Notre Dame Law Review
Volume 61 | Issue 5
Article 3
1-1-1986
Predatory Pricing in the Courts: Reflection on Two
Decisions
Peter C. Carstensen
Follow this and additional works at: http://scholarship.law.nd.edu/ndlr
Part of the Law Commons
Recommended Citation
Peter C. Carstensen, Predatory Pricing in the Courts: Reflection on Two Decisions, 61 Notre Dame L. Rev. 928 (1986).
Available at: http://scholarship.law.nd.edu/ndlr/vol61/iss5/3
This Article is brought to you for free and open access by NDLScholarship. It has been accepted for inclusion in Notre Dame Law Review by an
authorized administrator of NDLScholarship. For more information, please contact [email protected].
Predatory Pricing in the Courts:
Reflection on Two Decisions
Peter C. Carstensen*
I.
II.
III.
IV.
V.
Table of Contents
Introduction: Predatory Labeling ......................
The Legal and Economic Issues in Relating Predation
to M onopolization ......................................
A. Legal Implications of a Claim that a Price is Predatory ...
1. Predatoriness as an Element Which Makes a
Monopoly Unlawful ............................
2. Predatoriness as Unlawful Conduct .............
3. Unlawful Monopoly Engaged in Unlawful
Conduct ........................................
4. Conclusion .....................................
B. Application of Economic Theories of Predation to the
Litigation Context ....................................
Pricing Strategy as Part of a Program of
Monopolization: The Asphalt Paving Case .............
A. The Johnson Case ..................................
B. Alternative Economic Analyses ofJohnson's Conduct ......
C. The Sixth Circuit's Approach ..........................
D. The Implications of the Johnson Decision ..............
Strategic Pricing Behavior in Nonmonopolizable
Markets: The Rental Car Case .........................
A. The Adjusters Case .................................
B. Price Cutting as Business Strategy for a New Entrant ....
C. The Fifth Circuit'sApproach ..........................
D. Two Legal Conceptions of the Fifth Circuit's Predation
R ule ...............................................
Conclusion: The Future of Predatory Price Analysis in
M onopoly Law .........................................
928
930
930
933
935
941
943
943
947
947
949
952
954
957
957
960
963
966
969
I. Introduction: Predatory Labeling
Sometimes labels are helpful in providing an initial categorization of events which gets us more quickly to the relevant issues.
Legal analysis is particularly prone to using such pigeonholing sys*
Professor of Law, University of Wisconsin. I am indebted to Professor Willard F.
Mueller and several generations of students in our seminar in Antitrust Law and Economics
for their efforts, collectively and individually, to educate me on the issues of predation.
Many of the insights offered here derive from the discussions and papers of the seminar.
19861
PREDATORY PRICING
tems. Unfortunately, not all labels are equally helpful. Some act
more like either black holes or rat holes: They either swallow the
entire topic or provide nothing of analytic value. In present antitrust law analysis, the labels of "predation" and "predatory pricing" present examples of such dubious categories. It is commonly
assumed that if an enterprise engages in a "predatory" act, or
charges "predatory prices," it has violated either the Sherman Act's
prohibitions against monopolization or attempted monopolization
or, at least, contravened some other part of the antitrust laws.' For
this reason, courts and commentators have elaborated on the definitions of these terms. 2 But in so doing, these authorities have
made little or no effort to link their definitions to any analysis of the
law of monopolization.
There is in fact no express basis in any statutory language for
declaring that a "predatory" price is unlawful. 3 Nor does a label of
predation have any clearly defined relationship to a component of
any section 2 cause of action. The current preoccupation with
whether a price or other conduct is "predatory" in the abstract,
therefore, suggests a lack of legal analysis.
In general, terms should take their meaning from the context
of their use. Hence, before defining what "predation" is, lawyers
ought to have a clear idea of the legal relevance of the term. In
addition, if courts and litigants propose to use economic concepts,
they ought to use them correctly. Yet, recurrently, the cases suggest either a misapplication of economic theory itself or a misunderstanding of the relationship of data to theoretical concepts.
Such misinterpretation further confuses the analysis of predation.
That the results reached in many cases seem to yield acceptable
outcomes should provide not consolation, but rather, consternation-since the process suggests that the theories of predation
might, absent misapplication, have produced less desirable results.
In this article, I plan to illustrate and develop the foregoing
propositions. In Part II, I will identify some of the possible connecI See P. AREEDA & D. TURNER, 3 ANTITRUST LAW 711 (1976).
2 See id. See also R. POSNER, ANTITRUST LAw, AN ECONOMIC PERSPECTIVE 184-96
(1976); Brodley & Hay, PredatoryPricing: CompetingEconomic Theories and the Evolution of Legal
Standards, 66 CORNELL L. REV. 738 (1981); Dirlam, Marginal Cost Pricing Tests for Predation:
Naive Welfare Economics and Public Policy, 26 ANTITRUST BULL. 769 (1981); Scherer, Predatory
Pricing and the Sherman Act: A Comment, 89 HARV. L. REV. 869 (1976); Williamson, Predatory
Pricing: A Strategic and Welfare Analysis, 87 YALE L.J. 284 (1977); Zerbe & Cooper, An Empirical and Theoretical Comparison of Alternative Predation Rules, 61 TEXAS L. REV. 655 (1982).
3 This is true of all relevant statutes except, arguably, for an unused portion of the
Robinson-Patman Act which is not even technically part of the antitrust laws. RobinsonPatman Act § 3, 49 Stat. 1526 (1936) (codified at 15 U.S.C. § 13(a) (1982)) ("It shall be
unlawful for any person ... to sell . . . goods at unreasonably low prices .... "). This
section is not included within the definition of the antitrust laws found in section 1(a) of the
Clayton Act, 38 Stat. 730 (1914) (codified as amended at 15 U.S.C. § 12(a) (1982)).
NOTRE DAME LAW REVIEW
[Vol. 61:928
tions between labeling activity "predatory" and relevant legal and
economic issues in various kinds of monopoly cases. I will also
identify some of the issues that arise in both understanding and applying economic definitions in litigation. In Parts III and IV, I shall
discuss two recent circuit court decisions 4 which illustrate concretely some of the consequences of a poorly informed search for a
predatory price. This case analysis will lead me to offer some further adverse reflections in Part V on the use of the label "predatory
pricing."
II. The Legal and Economic Issues in Relating Predation to
Monopolization
A. Legal Implications of a Claim that a Price is Predatory
Most courts and commentators proceed as if they clearly understand the legal significance of a finding of predation; yet, nowhere in the Sherman Act is it said: "No person shall charge a
predatorily low price." 5 We must look elsewhere to find the linkage
between predatory pricing and the offenses defined in the Sherman
Act.
An analysis of the history of labeling conduct "predatory pricing" is not illuminating. Predatory pricing was a pejorative label
inserted in opinions without definition. 6 To be sure, Congress in
adopting the Sherman Act had a fairly clear legislative intent to forbid monopolists from creating or preserving monopolistic positions
by unlawfully exclusionary conduct. 7 One might therefore call all
exclusionary conduct "predatory," but that begs the definitional
question: All effective and successful competitive conduct has some
actual or potential exclusionary effect and the successful competitor
is aware of these consequences. 8 Such "intended" harm to competitors cannot, without more, violate the antitrust laws. Hence, it is
necessary to define what conduct is "unlawfully exclusionary."
While "predatory" may be a synonym for "unlawfully exclusionary," it is hardly a definition.
Professors Turner and Areeda triggered the contemporary policy debate over predation with an article containing legal analysis
which is ephemeral at best. They simply asserted:
A firm which drives out or excludes rivals by selling at un4
5
6
7
See notes 67-68 infra and accompanying text.
See note 3 supra and accompanying text.
See, e.g., United States v. American Tobacco Go., 221 U.S. 106, 182 (1911).
See W. LETWIN, LAW AND ECONOMIC POLICY IN AMERICA (1965); H. THOREI.LI, THE
FEDERAL ANTITRUST POLICY (1954). See also R. BORK, TIHE ANTITRUST PARADOX 68 (1978).
8 Cf United States v. Aluminum Co. of Am., 148 F.2d 416, 430 (2d Cir. 1945) (Hand,
J.) ("The successful competitor, having been urged to compete, must not be turned upon
when he wins.").
1986]
PREDATORY PRICING
renumerative prices is not competing on the merits, but engaging in behavior that may properly be called predatory. There is,
therefore, good reason for including a "predatory pricing" antitrust offense, within the proscription of monopolization or attempts to monopolize in section 2 of the Sherman Act. 9
Turner and Areeda's argument assumed that the firm charging the
predatory price was a monopolist with a given quantity of market
power and position. 10 The authors then asked how low a price (relative to different cost measures) such an enterprise could charge
before its conduct became unlawful. I Their analysis also assumed
that, even in the context of an otherwise lawful and apparently invulnerable monopoly, antitrust law ought to limit the monopolist's
pricing discretion-even if the law was unwilling or unable to remedy the power itself. In a sense, then, Professors Turner and
Areeda were advancing a mildly expansionary definition of the duty
2
which the Sherman Act imposes on a monopolist.'
The scholarly and judicial response to Turner and Areeda's article consists almost entirely of economic analyses of pricing or
other conduct without legal analysis of the significance of the conclusory "predation" label itself., Yet, in their treatise, which reasserts their predation argument, Turner and Areeda preceded their
restrictive definition of predation with a section in which they argued that any remediable monopoly ought to be "unlawful"-regardless of its conduct-if it was "persistent" and its power
''substantial"; but the remedy then should be exclusively equitable
and aimed solely at dissipating such power.' 3 Such a conclusion
demonstrates that Turner and Areeda saw the predation issue as
involving only the question of the lawfulness of particular conduct
by a monopolist when challenged in a criminal or damage action,
i.e., an action which did not challenge the lawfulness of the monop14
oly position itself.
9 Areeda & Turner, Predatoiy Pricing and Related Practices Under Section 2 of the Sherman
Act, 88 HARv. L. REv. 697 (1975).
10 See id. at 701-02, 704-09.
11 Id. at 709-16.
12 An alternative and more plausible response would have concluded that since the
pricing decision did little to entrench or prolong the monopoly, it was not "monopolization." Cf. Paschall v. Kansas City Star Co., 727 F.2d 692 (8th Cir.) (en banc), cert. denied,
105 S. Ct. 222 (1984); Official Airline Guides, Inc. v. FTC, 630 F.2d 920 (2d Cir. 1980), cert.
denied, 450 U.S. 917 (1981).
13 P. AREEDA & D. TURNER, supra note 1, 623.
14 A major source of Turner and Areeda's concern with sweeping definitions of predation was the risk of private damage claims. See Areeda & Turner, supra note 9, at 699. See
also Areeda & Turner, Schereron PredatoryPricing: A Reply, 89 HARv. L. REv. 891, 894 (1976).
The problem is illustrated by Telex Corp. v. IBM Corp., 367 F. Supp. 258 (D. Okla. 1973),
rev d, 510 F.2d 894 (10th Cir.), cert. dismissed, 423 U.S. 802 (1975). In Telex, the plaintiff, an
apparently inefficient producer, had proven that the defendant, IBM, had cut its prices to a
level which would eliminate plaintiff from the market although IBM's prices remained fully
NOTRE DAME LAW REVIEW
[Vol. 61:928
Taking the body of case law and writing as a whole, I discern
three distinct types of claims under section 2. First, there are cases
in which the lawfulness of the market position of the firm is at issue.
If it is an unlawful position, the law authorizes a remedy aimed at
15 But it is generally said that
eliminating such monopoly power.
"monopoly in the concrete"' 6 is not a violation; the monopoly must
be one which, in some sense, the firm has willfully acquired or
maintained.' 7 Hence, the conduct of the firm must satisfy this test
before any remedy aimed at dissipating its monopoly position is
justified.
Second, there are cases in which the only challenge is to the
lawfulness of particularconduct. This type of claim includes several
variant theories of what constitutes wrongful conduct, each of
which takes different account of the market position of the defendants. In some cases, the existence of monopoly power is at issue.
Plaintiffs' claims are then that particular acts or practices are unlawfulfor monopolists.18 Sometimes plaintiffs provide little information
about the defendants' market position; in such cases, the issue is
whether specific conduct is generally unlawful (as either "monopolization" or "attempted monopolization"). 1 9 In still other cases,
the defendants may have a substantial, but less than monopoly, position which is said to subject their conduct to a stricter standard of
review. 20 For each of these variants, the issue remains the lawfulness of the defendants' specific acts in light of its lawful, or at least
not unlawful, market position. 21
The third type of claim also focuses on the lawfulness of specific conduct but invokes a different legal analysis of the defendant's
compensatory and profitable. Such conduct was clearly exclusionary and so, in a sense,
anticompetitive. But in a truly competitive market a high cost firm such as Telex never
would have existed. The district court labeled this pricing as predatory and upheld a large
damage verdict. Subsequently, the Tenth Circuit reversed that verdict.
A better focus for the concerns of Professors Turner and Areeda might be damage
theory: Can a victim of above-cost pricing, i.e., a price which could have occurred in a
competitive market in stable, long-run equilibrium, claim damages based solely on losses
resulting from such pricing?
15 Standard Oil Co. v. United States, 221 U.S. 1, 77-78 (1911). Such remedy may be
structural or otherwise.
16 Id. at 62.
17 United States v. Grinnell, 384 U.S. 563, 570-71 (1966). See note 8 supra.
18 See, e.g., Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 105 S. Ct. 2847 (1985);
LorainJournal Co. v. United States, 342 U.S. 143 (1951).
19 See, e.g., Lessig v. Tidewater Oil Co., 327 F.2d 459 (9th Cir.), cert. denied, 377 U.S.
993 (1964).
20 See, e.g., In re E. I. DuPont de Nemours & Co., 96 F.T.C. 705 (1980).
21 See id. See also William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668
F.2d 1014 (9th Cir. 1981), cert. denied, 459 U.S. 825 (1982); Telex Corp. v. IBM Corp., 367
F. Supp. 258 (D. Okla. 1973), rev'd, 510 F.2d 894 (10th Cir.), cert. dismissed, 423 U.S. 802
(1975).
19861
PREDATORY PRICING
market position. In this approach, the plaintiff claims first that the
defendant has a monopoly position which is unlawful. 22 But then,
following the second approach, the plaintiff claims only that particular conduct by such an unlawful monopolist entitles it to either
23
damages or specific, conduct-oriented injunctive relief.
The theories undergirding these approaches strongly suggest
that each case could employ distinctive definitions of the kind of
conduct which is legally relevant and objectionable. In such cases,
the definition of an unlawful, "predatory" price should also vary.
1. Predatoriness as an Element Which Makes a
Monopoly Unlawful
Despite suggestions to the contrary, 24 courts still require plaintiffs in cases alleging an unlawful monopoly to show both the presence of monopoly power and its "willful acquisition or
maintenance." 25 Although the conduct criterion is very vague, its
function is relatively clear and distinguishes unlawful monopoly
cases from claims alleging that particular conduct alone is
wrongful.
Conduct evidence must demonstrate the unlawfulness of the
monopoly itself by showing that its possessor consciously obtained
or retained the dominant position. In this context, evidence that a
large firm (such as AT&T, IBM, or Kodak), without below-cost pricing or other economic loss, has excluded competitors is highly persuasive of a willful maintenance of a monopoly, especially in
contexts which demonstrate that the only rational economic explanation for the conduct was to achieve such exclusion. Such evidence both demonstrates strategic behavior aimed at excluding
competition and strongly suggests that the "centrifugal and centripetal forces" of the market no longer guarantee necessary limits
on the firm's monopoly power. 26 In fact, evidence of successful exclusionary conduct which does not involve deep price cuts ought to
be more persuasive of the entrenched position of the monopolist
than evidence that excluding competitors from the market required
a costly effort and deep price cuts. Paradoxically, the deeper the
price cut, the less convincing is the claim that the putative market
22 See, e.g., Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979), cert.
denied, 444 U.S. 1093 (1980). Cf. United States v. Griffith, 334 U.S. 100 (1948).
23 See Berkey Photo, 603 F.2d 263 (2d Cir. 1979).
24 See P. AREEDA & D. TURNER, supra note 1, 623; United States v. Grinnell, 236 F.
Supp. 244, 247-48 (D.R.I. 1964) (suggesting a rebuttable presumption of illegality once
monopoly is shown), affirmed in part, reversed in part, 384 U.S. 563 (1966). See also United
States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945).
25 Grinnell, 384 U.S. at 570-71.
26 Standard Oil, 221 U.S. at 62.
NOTRE DAME LAW REVIEW
[Vol. 61:928
power of the defendant is so substantial and dominating that a
court should declare it unlawful.
The fact that a firm has willfully maintained or acquired a monopoly does not necessarily make the monopoly illegal. As Judge
Learned Hand suggested, there must be exceptions for at least
some special cases. 27 Some exceptional cases involve a showing
that the challenged monopoly is a short-run phenomenon without
enduring power, and therefore, unworthy of judicial concern.
Still there remains the case of a monopoly which exists because
the market is "so limited that it is impossible to produce at all and
meet the cost of production except by a plant large enough to supply the whole demand." 28 A crucial issue in such a structural monopoly case is whether the power can be eliminated without
imposing significant economic costs on society. 29 The availability of
a remedy for such monopoly power is crucial.
Courts can draw some inferences about remediability from the
conduct needed to create and maintain the monopoly. As a monopolist requires more active, strategic behavior (e.g., deep price cutting or coercion of customers or suppliers), a conduct-oriented
remedy may well suffice to remove the monopoly power. Conversely, where the monopolist is able to maintain its position without employing overtly evil conduct, an effective remedy may
require more direct, structural changes. But inferences from history are not persuasive, and the key issue remains focused on the
expected societal costs and benefits of a proposed remedy.
This analysis suggests that it may make little sense to condemn
monopoly power itself as unlawful unless it can be effectively remedied. Should a monopoly position, acquired by conduct itself
clearly illegal, be tainted as perpetually illegal if a court cannot now
remedy that monopoly? While allowing customers and competitors
to tax such a monopolist may fulfill some noneconomic desires for
retribution, 30 it hardly makes sense as economic policy.31
27 United States v. Aluminum Co. of Am., 148 F.2d 416, 429-30 (2d Cir. 1945)
("[P]ersons may unwittingly find themselves in possession of a monopoly ....The success-
ful competitor, having been urged to compete, must not be turned upon when he wins.").
28
Id. at 430.
29 A firm as large as U.S. Steel has successfully invoked this claim. United States v.
United States Steel Corp., 251 U.S. 417, 454-57 (1920).
30 Cf Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 295-96 (2d Cir. 1979)
(past misconduct made monopoly illegal in perpetuity and so liable for damages), cert. denied, 444 U.S. 1093 (1980).
31 One might argue that repeated damage awards will deter other firms from engaging
in such conduct. However, those who actually did the predatory acts will have long since
left the defendant firm, a fact which reduces greatly the impact of the deterrence lesson.
Moreover, unending damage claims can ultimately require payments beyond any rational
level of deterrence, especially when applied to a firm whose monopoly power is apparently
unavoidably associated with its economic efficiency. The better method for achieving de-
1986]
PREDATORY PRICING
In sum, the key elements of a structural monopoly case are monopoly power and its remedy. The conduct of such a firm, while a
necessary element, is secondary. Moreover, by establishing restrictive definitions of the conduct element, courts will preclude themselves from dealing with some "well behaved" but remediable
monopolies and may try to remedy "bad" but unavoidable
monopolies.
2.
Predatoriness as Unlawful Conduct
The original Turner-Areeda definition of predatory pricing addressed the (relatively) narrowly-defined case in which the plaintiff,
seeking primarily damages, challenges the specific pricing conduct
of a monopolist. The plaintiff must establish, first, that the defendant has sufficient market power to render it a firm with monopoly
position and, second, that it has "abused" its monopoly position by
charging predatorily low prices. Given proof of both elements, the
plaintiff is entitled to damages and injunctive relief as to pricing.
This plaintiff does not seek any dissipation of the defendant's monopoly position; it merely demands that defendant's use of its monopoly power be regulated so that plaintiff's economic interests are
not harmed. Indeed, plaintiffs in such cases may affirmatively desire the ultimate umbrella of monopoly prices. The unarticulated
premise here is that the monopolist has a duty to charge a monopoly
price.
The policy underlying Turner and Areeda's restrictive definition of a predatory pricing is clear. In a competitive market,, in
long-run equilibrium, prices would never exceed average total cost.
Any firm unable to keep its costs at or below the industry average
would be reasonably certain to fail. If the plaintiff cannot survive
when the monopolist charges an above-cost price, it could not have
existed in a competitive market and can only exist because the monopolist holds its price high enough. The plaintiff is a "victim" of a
price reduction by such a monopolist only because its prior expectations of the monopoly-price umbrella are disappointed.3 2 Alterrence is by a large fine, levied once. See K. ELZINGA & W. BREIT, THE ANTITRUST PENAL(1976).
32 A similar analysis seems to underlie the Second Circuit's rejection of Berkey Photo's
demands that Eastman Kodak share technological information about its new products. 603
F.2d 263, 279-85. Berkey wanted to share in the Kodak monopoly rather than face a competitive market. Such a limited claim may well confront courts with very significant risks of
undesirable consequences if they give a "false positive" answer to the claim of predation.
To avoid such risks, it may be rational, if such claims are to be accepted at all, to define
rigorously the conduct required. For analysis of the false positive and false negative risks,
see Jaskow & Klevorick, A Framework for Analyzing Predatory PricingPolicy, 89 YALE LJ. 213
(1979).
TIES: A STUDY IN LAW AND ECONOMICS
NOTRE DAME LAW REVIEW
[Vol. 61:928
lowing such a victim to force its monopolist competitor to raise
prices or pay damages serves no social or economic public interest.
In both unlawful structural monopoly and abuse of monopoly
position cases, the plaintiff must first prove the monopolistic position of the defendant-only then does the court consider the defendant's conduct. But the focus here is quite different, suggesting
distinct meaning to the characterization of such conduct as "predatory." In an abuse of monopoly case, a conclusion of predation
means that the court should provide damages and/or injunctive relief to abate the abusive conduct; whereas in a case challenging the
monopoly power as unlawful, the predation characterization means
that the market power is itself wrongful and should be remedied.
The latter conclusion does not demand or even suggest that the
conduct which made the continued possession of power wrongful
should itself be the basis for damages or specific injunctive relief.33
The only damage claims which can in fact be valid will involve
overcharges, even though such prices are neither predatory nor
34
exclusionary.
33 Cf. United States v. United Shoe Mach. Corp., 110 F. Supp. 295, 344-45 (D. Mass.
1953), afdper curiam, 347 U.S. 521 (1954). Of course, in that case, once the monopoly was
declared unlawful, victims of its purported overcharges claimed damages. See, e.g., Hanover
Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481 (1968).
34 See Hanover Shoe, 392 U.S. 481 (1968). See also P. AREEDA & D. TURNER, supra note 1,
710. ("Monopoly pricing and monopoly profits should not be deemed either an 'exclusionary' act or an 'abuse' of monopoly power under § 2.")
Illustrative of the frequent confusion of these two uses of conduct are the opinions of
the Federal Trade Commission (FTC) in the ReaLemon case. In re Borden, Inc., 92 F.T.C.
669 (1978), afd, 674 F.2d 498 (6th Cir. 1982), vacated, 461 U.S. 940 (1983), modified decree
entered, 102 F.T.C. 1147 (1983). Chairman Pertschuk, writing for the majority, first found
ReaLemon to be a monopolist in the reconstituted lemon juice market and then relied on
its conscious, selective, and deep price cutting (aimed at its strongest competitor which was
apparently also a lower cost producer) as evidence that ReaLemon was consciously trying to
maintain a monopoly position. 92 F.T.C. at 795-802. This conduct sufficed to make Borden's ReaLemon an unlawful monopoly, and the issue then became one of remedy: Specifically, what remedy would most easily dissipate this unlawful monopoly? Id. at 806-09.
Although the original complaint proposed compelling the licensing of Borden's ReaLemon
trademark, id. at 774-76, a remedy which would have gone to the core of the monopoly
power, that proposal unleashed a pack of negative responses. See, e.g., amicus briefs filed in
the proceeding, 310 PAT. TRADEMARK & COPYRIGHTJ. (BNA) D-I (amicus brief of the U.S.
Trademark Association) (January 6, 1977); 321 PAT. TRADEMARK & COPYRIGrJ. (BNA) E- 1
(amicus brief of the U.S. Dept. of Commerce) (March 24, 1977). See also Pallandino, Compulsory Licensing of a Trademark, 26 BUFFALO L. REV. 457 (1977); Note, Compulsory Trademark
Licensure as a Remedy for Monopolization, 26 CATri. U.L. REv. 589 (1977). Consequently, the
Commission majority opted over Chairman Pertschuk's partial dissent to focus its remedy
strictly on Borden's pricing conduct. 92 F.T.C. at 807-08, 809-13. See also 102 F.T.C. at
1147-50. Importantly, the majority opinion did so on the theory that this would dissipate
the monopoly power itself. 92 F.T.C. at 807-08.
Commissioners Clanton and Pitofsky wrote separate concurring opinions in which they
debated the merits of certain definitions of predatory pricing. These opinions imply that if
Borden were able to eliminate an equally or more efficient rival by a pricing strategy that
did not involve quite such deep price cuts, then Borden's consciously maintained monopoly
1986]
PREDATORY PRICING
In the great run of cases in which predation is at issue, the market position of the putative wrongdoer is either not monopolistic or
unknown. These cases therefore cannot involve condemnation of
conduct made unlawful due to the monopoly market position of the
defendant. These cases involve challenges to conduct the lawfulness of which does in some cases take account of the defendant's
market position, but in other cases, there is no connection to market position. This dual treatment is strange because generally
courts want proof of a likelihood of success (potentiality for monopoly), coupled with clearly wrongful conduct, before they will
find a violation.3 5 But in predatory price cases many courts have
not insisted on that link.3 6 The policy behind making one type of
price conduct illegal under section 2 without regard to the likelihood of success or general effect on the market is at first blush puzzling. Indeed, if courts were asked to explain the connection
between such "predation" and the traditional concerns of monopoly and attempt to monopolize law, one suspects they might have
some difficulty.
One can rationalize the connection.3 7 For example, if predatory prices are always unambiguously evil or unjustified by any legitimate market or competitive objectives, then it is reasonable to
fashion an across-the-board condemnation. Such prices are impermissible and irrelevant weapons for lawful competition. Such conduct could only reduce competition and move a market toward
monopoly. Regardless of the power of the actor or the chance of
success, such conduct would be objectionable as without any possible redeeming feature. This is a slightly expansive definition of the
attempt concept, but it has a sound basis in both logic and policy.
position would not have been unlawful. Id. at 822-24 (Pitofsky, C., concurring); id. at 81416 (Clanton, C., concurring). It is impossible to say whether either author in fact subscribed to such a theory because neither discussed the legal function of characterizing the
pricing conduct in that case. Intent onjoining the debate about the definition of predatory
price, the opinions subtly transformed the general understanding of the ReaLemon case and
suggested that the only issue before the FTC was the unlawfulness of specific conduct by an
otherwise not unlawful monopolist. Many of the responses to the original Areeda and Turner article suggest a similar confusion as to the legal meaning of a predation conclusion.
See, e.g., Scherer, supra note 2, at 869.
Despite confusion on the issue of lawfulness of conduct versus monopoly power, the
entire case focused on a firm which was clearly a monopoly. Thus, even as a conduct case,
the issue was the validity of specific conduct by a firm with such power.
35 See, e.g., United States v. American Airlines, Inc., 743 F.2d 1114 (5th Cir. 1984), cert.
dismissed, 106 S. Ct. 420 (1985); United States v. Empire Gas Co., 537 F.2d 296 (8th Cir.
1976), cert. denied, 429 U.S. 1122 (1977). Cf. Cooper, Attempts and Monopolization: A Mildly
ExpansionaryAnswer to the Prophylactic Riddle of Section Two, 72 MICH. L. REv. 373 (1974).
36 See, e.g., Adjusters Replace-A-Car, Inc. v. Agency Rent-A-Car, Inc., 735 F.2d 884 (5th
Cir. 1984), cert. denied, 105 S. Ct. 910 (1985).
37 William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014,
1027-31 (9th Cir. 1981), cert. denied, 459 U.S. 825 (1982).
NOTRE DAME LAW REVIEW
[Vol. 61:928
It is also consistent with a long-standing strand of attempt
analysis .38
The justification for such an expansive inclusion of pricing conduct within the attempt category would also explain why it is then
rational to impose a very restrictive standard in defining the pricing
behavior which violates section 2. That low prices relative to costs
can be a vital element in effective competition is intuitively obvious.
Such prices can introduce new products by capturing customer attention; they can result from oversupply or a sudden decline in demand; and they can also result from higher than expected
39
production costs.
Not only, then, may relatively low prices be rational; but if the
definition of what constitutes a predatory price is vague, a highcost, inefficient competitor can make anticompetitive, strategic use
of a predation charge. Hence, in defining predatory prices for such
a sweeping attempt concept, the focus should be on a clear definition of those prices which are unambiguously without justification
in a competitive market. Such an approach retains a clear basis in
monopoly law and its policy concerns. It seeks to eliminate conduct
which is not merely unfair in some ethical sense but also likely,
whether intended or not, to cause harm to the competitive process
and to hasten the arrival of monopoly.
The result, as mirrored in a number of cases,4 0 is not as definitive as the policy rationale would seem to demand. Courts consider
price-cost relationships, but also evaluate intent and legitimate explanations for pricing behavior. Most such cases do draw a clear
line of demarcation: A fully compensatory price, i.e., one which
covers all costs, whatever its effect on other competitors, is lawful.
The problems of excuse and justification only arise for prices which
are below the long-run measure of economic survival and therefore
demand some further justification. In a competitive market, such
prices can and predictably would occur; hence, they cannot in and
of themselves be wrongful-even if they contribute to the growth of
38 See Lessig v. Tidewater Oil Co., 327 F.2d 459 (9th Cir.), cert. denied, 377 U.S. 993
(1964).
39 In an effectively competitive market, producers confronting high costs, if they wish
to remain in the market, must still sell at the market price. While in classic economic theory
no firm will remain in such a market when its marginal costs exceed its expected prices, in
the real world such conduct is not always irrational. For example, a new entrant confronting initial learning costs may predict lower cost in the future but only if it continues to
produce. Alternatively, given high exit and restarting costs, a firm expecting better prices
in the future may continue to operate despite short term loss.
40 See, e.g., Transamerica Computer Co. v. IBM Corp., 698 F.2d 1377 (9th Cir.), cert.
denied, 464 U.S. 955 (1983); MCI Communications Corp. v. AT&T Co., 708 F.2d 1081 (7th
Cir.), cert. denied, 464 U.S. 891 (1983); Janich Bros., Inc. v. American Distilling Co., 570
F.2d 848 (9th Cir. 1977), cert. denied, 439 U.S. 829 (1978); 0. Hommel Co. v. Ferro Corp.,
659 F.2d 340 (3d Cir. 1981), cert. denied, 455 U.S. 1017 (1982).
1986]
PREDATORY PRICING
market position of the firm employing them. Other factors can
4
make the analysis even more complex. '
There is another possible explanation for the concern about
predatory prices divorced from any present danger of monopoly.
The common law of unfair competition has always recognized that
some kinds of price competition might be unlawful. The common
law, however, lacked a workable definition of what prices were unfair.42 Nevertheless, English common law embraced a standard
which made lawful any price made in good faith to compete, even if
the firm intended to drive another from the market. 43 Low prices
were unlawful only if set with "malice," which entailed a
nonmarket-oriented desire to inflict harm on another. 44 The first
Restatement of Torts and the few American courts which have decided similar cases seem to have adopted this point of view. 45 The
key to creating a more restrictive standard lay in finding some criteria to judge the merits of prices themselves.
A second problem for the development of a common law of
unfair low pricing in the United States is the nation's federalist
structure in which more than fifty independent jurisdictions define
41 In the recent titanium-dioxide case, the FTC evaluated the pricing conduct of a dominant firm having clear cost advantages over its rivals. In re E. I. DuPont de Nemours & Co.,
96 F.T.C. 705 (1980). The dominant firm employed limit pricing and strategic expansion
in a confessed effort to discourage new entry and acquire all growth in demand. Id. at 707.
The resulting prices were above total cost and quite consistent with or even above those
which a competitive market would have produced. In addition, the planned plant expansions reflected rational business decisions regardless of any expected monopoly profit. The
Commission unanimously rejected its staff's challenge to this conduct. It did so, however,
only after an extended analysis of the evidence of the legitimacy and rationality of the conduct at issue. The Commission apparently felt obliged by the defendant's position as a
dominant firm to make such a review and to test rigorously the conduct's rationality as
business behavior in a competitive market and was not satisfied to merely compare it with
abstract pricing formulae. Id. at 721.
42 The famous English case of Mogul Steamship Co. v. McGregor, Gow, & Co., 23 Q.B.
Div. 598 (1889), afd, 1892 A.C. 25, illustrates the problem and its traditional resolution. A
group of steamship lines had colluded to exclude a competitor by several tactics including
price cuts to levels well below total cost. The court focused on the lawfulness of the prices.
(A comparable American case reached an opposite result because of its focus on the conspiracy issue and the clear American law outlawing such conspiracies. See Thomsen v.
Cayser, 243 U.S. 66 (1917)). In Mogul Steamship, one judge argued that any price below
average total cost was unlawful if it diverted trade. 23 Q.B. Div. at 609-11 (Lord Escher).
The majority rejected this approach because it would constrain too much and too ambiguously the freedom of action of competitors. Id. at 613-15 (Bowen,J.); id. at 625-28 (Fry,J.).
In the majority's view, below-cost prices made legitimate economic and business sense in a
number of market contexts. Nevertheless, because low prices could destroy the business of
another, even the majority believed that such prices should be subject to some legal review.
Id. at 615, 625.
43 Id. at 613-15 (Bowen, J.).
44 Id. at 615, 625.
45 Kapper v. Katz, 7 Cal. App. 2d 1, 44 P.2d 1060 (1935); Dunchee v. Standard Oil Co.,
152 Iowa 618, 132 N.W. 371 (1910); Tuttle v. Buck, 107 Minn. 145, 119 N.W. 946 (1909);
RESTATEMENT OF TORTS § 708 (1938). Cf Thomsen v. Cayser, 243 U.S. 66 (1917).
NOTRE DAME LAW REVIEW
[Vol. 61:928
the common law system. This system makes both progress and resolution of conflicts very difficult and subjects most major economic
actors to multiple and potentially conflicting rules. Thus, the Sherman Act's adoption was partly motivated by a desire to "federalize"
46
the common law on restraint of trade and monopoly.
Narrowly defined, these antitrust categories probably did not
include the general topic of unfair competition. However, courts
have frequently defined the Sherman Act's concerns broadly and
used it as a device to establish a federal jurisdiction over, and relatively uniform standards for, any and all anticompetitive conduct
which affects interstate commerce.
In this context, Turner and Areeda's effort to define predatory
pricing both gave content to the ambiguous common law tort of
unfair prices and helped to provide it with a federal forum. This is
not to suggest that Professors Turner and Areeda had such an expansive agenda. Their article in fact carefully limited the cases for
which they were defining predation to conceded but otherwise lawful monopolists. Nonetheless, their analysis provided economic criteria for judging the fairness of price regardless of economic
structure. Thus, courts could and did apply their definition of predation to all cases in which the issue was the "fairness" of a pricing
strategy.
In defining predation in cases involving nonmonopolists,
courts ought to be at least as conservative, i.e., restrictive, as they
would be in attempt to monopolize cases. Predation by nonmonopolists poses no necessary threat to competition or the overall competitiveness of markets. At most predatory pricing here represents
an impermissible harm to another competitor. Any judicial review
of such pricing creates significant risks of false positive findings
which would condemn conduct which is in fact both economically
and socially desirable. Hence, absent monopoly, near monopoly,
or at least a threat of monopoly, the risks ofjudicial review suggest
47
that only very clearly wrongful pricing ought to be condemned.
In sum, there are three relatively distinguishable variations on
the basic theory that certain low prices are themselves wrongs. The
degree of monopoly may be relevant to the choice of a suitable definition of what is too low a price; thus, many circuits do in fact have
46 H. THORELLI, supra note 7, at 181-84; W. LETWIN, supra note 7, at 96.
47 There are a number of important policy issues which courts should consider when
they evaluate a sweeping assertion of predation jurisdiction. For example, why give treble
damages for this business tort but not for others, even others which have direct federal law
status? See, e.g., Lanham Act § 43a, 60 Stat. 427, 441 (1946) (codified at 15 U.S.C.
§ 1125(a) (1982) (predatory, false, comparative advertising declared illegal and private
remedies created). See generally Bauer, A FederalLaw of Unfair Competition: Tl'hat Should Be the
Reach of Section 43(a) of the Lanhan Act?, 31 UCLA L. REv. 671 (1984).
1986]
PREDATORY PRICING
somewhat varied standards. 48 None of these approaches makes the
market power of the defendant illegal in itself.
3.
Unlawful Monopoly Engaged in Unlawful Conduct
The final legal context in which the predation issue may arise
involves a combination of the first and second theories. Here, the
plaintiff first establishes that the defendant possesses an unlawful
monopoly. 49 Second, the plaintiff demands only damages resulting
from the unlawful monopolist's pricing conduct and/or an injunction against that conduct. What is not sought is a remedy that
would redress the unlawful monopoly power itself.
There is an obvious anomaly in this approach. Having established the illegality of the defendant's monopoly position, what
right has the plaintiff to demand that a court ignore that continuing
offense so long as the defendant pays the plaintiff tribute, in the
form of treble damages, and makes some specific reformation of its
conduct which will protect the plaintiff? Unfortunately, the courts
themselves seem to insist upon this anomaly. They have expressly
refused or shown deep reluctance to grant private litigants relief
aimed at exterminating unlawful monopoly power. 50 Given such
judicial responses, the private plaintiff is left with damages and,
perhaps, a narrowly drawn, conduct-oriented injunction.
However, if unlawfulness requires not only willful acquisition
and maintenance of monopoly power, but also demonstrable
remediability, then it is probable that most private cases do not satisfy that last criterion. Hence, it is not accurate to describe those
monopolies as unlawful. The case proven is in fact solely one of the
second type: an unlawful abuse of a monopoly position. But courts
often first find the monopoly itself unlawful, as a step in the damage
analysis, without explanation of the relevance of the conclusion.51
Unfortunately, such a finding suggests that any strategic pricing which is evidence of unlawful monopolization is also a basis for
damages. There is no need, however, to link those conclusions.
Conduct which makes monopoly power unlawful need not inevitably provide a basis for damages. Similarly, no economic logic dic48 See, e.g., Arthur S. Langenderfer, Inc. v. S. E.Johnson Co., 729 F.2d 1050 (6th Cir.
1984), cerl. denied, 105 S. Ct. 511 (1985); William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014 (9th Cir. 1981), cert. denied, 459 U.S. 825 (1982); International Air Indus. v. American Excelsior Co., 517 F.2d 714 (5th Cir. 1975), cert. denied, 424
U.S. 943 (1976).
49 Cf. Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 272-73 (2d Cir. 1979),
cert. denied, 444 U.S. 1093 (1980).
50 Arthur S. Langenderfer, Inc. v. S. E.Johnson Co., 729 F.2d 1050 (6th Cir. 1984), cert.
denied, 105 S. Ct. 511 (1985); IT&T Corp. v. GTE Corp., 518 F.2d 913, 920-24 (9th Cir.
1975). Cf. Berkey Photo, 603 F.2d at 296 n.55.
51 See Berkey Photo, 603 F.2d at 272-73.
NOTRE DAME LAW REVIEW
[Vol. 61:928
tates that those prices which would be unlawful in an attempted
monopoly case (or even an abuse of a not unlawful monopoly position case) would alone qualify for damages given an unlawful monopoly. 52 This in turn suggests that courts should more carefully
53
delimit the focus of a plaintiff's case.
One might therefore suggest that, in a damage case or one demanding specific conduct remedies, the only relevant issues are
whether the defendant is a monopolist or otherwise governed by
section 2, and whether the specified conduct is wrongful. The lawfulness of the monopoly power itself is not an issue. The latter is
still relevant, but only if the plaintiff is seeking (and is entitled to
55
seek 54 ) a remedy aimed at termination of the unlawful power. Of
course, one should also confront the question of the damage rights
of customers or suppliers who were victims of the exploitative
56
prices of such an unlawful monopoly.
52 One arguable position is that, if the monopoly is itself unlawful, any price below
average total cost would justify damages while, if there is no monopoly or no unlawful
monopoly existed, only prices below variable cost could be the basis of a damage claim. To
avoid obvious circularity, it would be necessary to define unlawful monopoly not only in
terms of conduct but also in terms of remediability so that the more generous damage
award standard would directly encourage pricing conduct favorable to efficient entry into
markets where competition has been proven to be a practical alternative.
53 See, e.g., Berkey Photo, 603 F.2d 263.
54 Based on the sweeping statutory language of the Clayton Act one would have
thought such an entitlement was clear. See Clayton Act § 16, chap. 323, 38 Stat. 730, 737
(1914) (codified at 15 U.S.C. § 26 (1982)) ("Any person... shall be entitled to ... injunctive relief ... against threatened ... violation of the antitrust laws .... "). Although key
opinions seem to reject a right to structural relief, see note 50 supra, this does not negate
other conduct-oriented remedies which have as their objective not regulating the use of
monopoly power but rather its extermination. See United States v. American Can Co., 126
F. Supp. 811 (N.D. Cal. 1954) (lease terms forbidden and defendant ordered to sell its
equipment at favorable prices); United States v. United Shoe Mach. Corp., 110 F. Supp.
295, 346-47 (D. Mass. 1952) (lease-only contracts forbidden in order to create gradual restructuring of the market).
55 One can also argue for a different damage right when the monopoly is unlawful in
the type-one analysis sense. See text accompanying notes 24-31 supra. If the plaintiff has
shown the defendant's monopoly to be remediable, the resulting unlawfulness of the defendant's power justifies a more generous measure of damages. Any conduct not "impelled" by economic circumstances would justify damages including all strategic pricing
profits, whether above or below cost, which in any way aids the monopolist in retaining its
position. In addition, the measure of damages could be the difference between the optimal
short-run monopoly price and any prices actually charged. Such a damage rule would tend
to force an unlawful monopolist to keep its prices at a high level. That in turn would expedite entry. One might, of course, argue that such an approach is inefficient. Ex hypothesis,
the monopoly to be unlawful must be remediable, and therefore a direct remedy would
probably speed the restructuring of the market and involve lower economic costs. But this
result demands that the courts grant such remedies whenever unlawful monopoly is
proven.
56 See note 34 supra.
1986]
4.
PREDATORY PRICING
Conclusion
While courts and commentators believe that labeling a price as
predatory is fraught with legal significance, and to date they have
put great emphasis on defining what is "predatory," there has been
little reflection on the legal relevance of the conclusion. When we
ask about legal relevance, it appears that the reasons for assessing
the merits of a pricing strategy may well vary depending upon
whether the claim is that the monopoly is itself illegal, that an actual
but not unlawful monopolist has abused its position, that a
nonmonopolist is attempting to monopolize a market by offering
low prices, or, finally, that a firm has engaged in unfair competition
by utilizing low prices which harm a competitor.
What is unlawful should depend upon why that information is
relevant to the claim before the court. No basis exists for thinking
that there is, or necessarily should be, a single definition of what is
an unlawfully low price. Nevertheless, courts and commentators
seem far more interested in debating the abstractions of economic
theory than in evaluating the legal relevance of price conduct to the
particular type of monopoly case presented.
B. Application of Economic Theories of Predation
to the Litigation Context
If courts are going to practice economics, they better do so
correctly and with some understanding of what they are doing. In
the context of antitrust law, economic theory can be a tool of factual analysis or it can be a type of formalistic, doctrinal constraint
on relevant factual inquiry.
As a tool, economic theory makes predictions about consequences that will result from conduct under given, i.e., assumed,
conditions. It can also suggest what consequences might have resulted if different conduct had occurred or if the assumed conditions were varied. Finally, economic theory suggests values and
goals for antitrust policy. If efficient, dynamic markets are a primary objective, then economic theory can begin to set some criteria
to test for their existence.
When economic theory is deployed as a tool of analysis, it has
to fit the facts. Turner and Areeda, for example, expressly assumed
market conditions for the price-setting firm which meant that the
firm in selecting its prices would have no significant concern for its
long-run market dominating position. 5 7 This monopoly was, for
some unstated reason, invulnerable to competition. Professors
Scherer, Williamson, and others have expressly or implicitly varied
57
Areeda & Turner, supra note 9.
NOTRE DAME LAW REVIEW
[Vol. 61:928
those assumptions. 58 In particular, they have not assumed any
long-run invulnerability for the monopolist. Consequently, they
have argued that prices which do not violate the Turner-Areeda
guidelines could still exclude socially desirable competitors and
that such prices thus should be unlawful. 5 9 The resulting debate
often turned on points of model building and general applicability
rather than on any factual validity, set in specific contexts, of the
alternative assumptions.
If economic analysis is to be used as an instrument to help inform and illuminate legal policy, such analysis of specific cases is
vital. But such an instrumental use of economic theory also requires precise definition of the legal issues being resolved and a
clear statement of why predation is legally relevant to any case.
Thus, until the economic theorist has a legal standard to evaluate,
there is no basis on which to define the term "predatory price."
It should matter greatly to the economic analyst whether the
legal issue being considered is one of the lawfulness of the monopoly itself, i.e., should the courts do something to dissipate the monopoly, or whether the issue is the tortious quality of specific
pricing conduct under one of the three legal analyses developed
earlier.60 Of course, an economist might conclude that the same
definition of predation ought to apply in all circumstances, but this
conclusion requires a consideration of competing economic values
and policies as they relate to each type of claim. Such a focus, at
least initially, is far removed from the specifics of defining predatory price.
It is not my purpose here to discuss the validity of differing
approaches to defining predation (from either a functional or doctrinal perspective). That has been done well elsewhere. 6 ' I wish
only to emphasize that any economic analysis of predation must depend on the legal issue to which the analysis relates. Yet, most of
58 Banmol, Quasi-Permanenceof Price Reductions: A Policyfor Prevention of Predatory Pricing,
89 YALE L.J. 1 (1979); Scherer, supra note 2, at 869-83; Williamson, supra note 2, at 286306. See also Brodley & Hay, supra note 2, at 751-56.
59 The ReaLemon case provides a concrete example wherein this seems to be true. In re
Borden, Inc., 92 F.T.C. 669, 826-31 (1978) (Pitofsky, C., concurring), affd, 674 F.2d 498
(6th Cir. 1982), vacated, 461 U.S. 940 (1983), modified decree entered, 102 F.T.C. 1147 (1983).
Specific case studies have supported this view. See D. Rosenbaum, A Study of Firm Strategies Designed to Deter Entry as Revealed in Three Antitrust Cases (Ph.D. dissertation,
Univ. Wisc. 1985) (reviewing facts of ReaLemon (discussed in note 34 supra), In re E. I. DuPont de Nemours & Co. (the titanium-dioxide case, discussed in note 41 supra), and Aiuninum Co. ofAm. (see notes 8 and 27 supra), and demonstrating conditions under which equally
efficient producers could be eliminated). Cf. R. POSNER, supra note 2, at 191-93.
60 See text accompanying notes 15-56 supra.
61 See Brodley & Hay, supra note 2, at 757-64; Jaskow & Klevorick, supra note 32, at 21922; Schmalensee, On the Use of Economic Models in Antitrust: The ReaLemon Case, 127 U. PA.
L. REV. 994 (1979); Zerbe & Cooper, supra note 2, at 659-77.
1986]
PREDATORY PRICING
the economists and lawyers writing on the topic of predation have
failed to define that issue, and so their work can be of only marginal
relevance to any legal analysis of the conduct at issue in the cases.
The other use of economic theory is as a type of formalistic,
legal doctrine. In specific cases, courts need not know why predation is bad; if the defendant's conduct violates a rule laid down by
an authority, liability exists. Such economic doctrines may have rational bases in theory and be quite relevant as an empirical explanation of conduct under assumed conditions. In fact, courts originally
may have embraced such theories as good explanations for specific
factual situations. However, once courts accept that theory establishes the criteria for a violation rather than that theory provides a
way to evaluate facts, economic theory takes on a doctrinal function. It specifies the factual conclusions that must exist before a
violation can occur. Such an approach puts an even greater premium on the correct use of the economic tools. Slight factual distinctions become outcome determinative. 62
Another key problem in any application of economics to litigation is that the cost concepts of economics have no necessary counterparts in business accounting. 63 This is particularly true of the
variable-cost concept. Turner and Areeda's formulation has become increasingly arbitrary regarding what costs to include in com62 Whichever use a court makes of economic analysis, it must use it correctly. While it
is true that predatory price itself is not an economic concept, it can be, and always is, defined by reference to established economic terms. Most traditional economic concepts have
relatively clearly-defined theoretical meanings. The key economic concepts are "average
total cost" and "marginal cost." The second is approximated by "average variable cost."
Such cost concepts have a number of components, including "time."
The time period is an especially crucial factor in variable-cost analysis. The shorter the
period, the more factors and consequent costs are fixed. If we look at each day as a separate period, we may see unused capacity, e.g., an unfilled bread loaf pan and an empty place
in a bread truck. The incremental cost of a loaf is then but the cost of ingredients. This
eliminates almost all production cost and suggests the average variable cost is very low.
Breadmaking emerges with very high fixed costs; but if one takes a longer period of time, a
week, a month, or even a year, more and more of the costs become controllable and so
variable.
Moreover, economic analysis does not always focus only on the short run. In the case
of new entry, the rational entrant must expect total income to equal or exceed total costs.
Hence, if a court discovers that a firm is both entering a market and charging prices below
its average total cost, such a firm is, prima facie, acting irrationally. Yet future expected
above cost prices could explain that behavior. Hence, it is relevant to inquire under what
conditions could such an entrant expect or obtain its long-run profit. Manifestly, if over a
reasonable time period, the entrant can expect to recover all its costs and earn a reasonable
return on its investment, its entry decision is rational. Of course, its future profit could
result from excluding its existing competitors and charging a monopoly price, or from its
costs falling as it gained experience, or from demand expanding in response to its lower
prices, yielding a volume at which lower costs would make its prices profitable. A court
might therefore evaluate the merits of such conduct differently even though the cost data is
similar.
63 See Areeda & Turner, supra note 9, at 716-18.
NOTRE DAME LAW REVIEW
[Vol. 61:928
puting the concept of average variable cost. 64
Equally challenging problems arise when courts try to determine appropriate average total costs. To an accountant, costs are
expenses and so total costs involve all expenditures which an enterprise must make; but there is no price, and thus no cost, for using
any capital invested in the enterprise as ordinary equity. Hence, to
the accountant, when the firm recovers its expenses (including
overhead and other fixed costs), it is operating above total cost
even if its common stock owners receive nothing. In contrast, the
economic definition of total cost includes all costs required to keep
the enterprise in the business, and so, total cost includes a reasonable return on equity as an essential part of the costs of doing
business .65
Finally, consider the fact that classic economic price theory is
static. It describes a world in equilibrium. The world may be monopolistic or competitive, but the economic model only predicts
what prices firms will charge in order to maximize profits (on the
assumption that their conduct will not affect the future condition of
the market). Some economists question whether such a static view
of conduct has any relevance to antitrust concerns with the dynamics of conduct by which firms acquire and maintain market positions. 6 6 Thus, a court confronts a three-fold problem of deciding
whether a static price theory is appropriate, how exactly to define
the time period and other elements of the theory chosen, and how
to relate accounting data to the economic theory.
A number of cases illustrate the failures of judicial legal-economic analysis of predation. Two recent decisions, Arthur S.
Langenderfer, Inc. v. S. E. Johnson Co. 6 7 and Adjusters Replace-A-Car,Inc.
64 See In re Borden, Inc., 92 F.T.C. 669, 815 nn.5 & 6 (1978) (Commissioner Clanton
discussing changes in definitions of Turner and Areeda), afd, 674 F.2d 498 (6th Cir. 1982),
vacated, 461 U.S. 940 (1983), modified decree entered, 102 F.T.C. 1147 (1983).
65 See, e.g., Areeda & Turner, supra note 9, at 704. The following example reveals the
difference: Suppose a business employed $1 million in capital and, after all costs and traditional expenses were paid, had a profit of $1,000. That would mean that it had earned a
return of .1% on its investment. To the accountant, this firm had priced above costs. On
the other hand, since the return would be manifestly inadequate to justify continued investment in the business, the economist would say that this firm had priced below its average
total cost. Failure to appreciate the difference in these views of total cost is very troublesome especially if, as many courts have held, prices above average total cost are irrebuttably
presumed to be lawful. See Arthur S. Langenderfer, Inc. v. S. E. Johnson Co., 729 F.2d
1050 (6th Cir. 1984), cert. denied, 105 S. Ct. 511 (1985).
66 Demsetz, Two Systems of Belief about Monopoly, in INDUSTRIAL CONCENTRATION: THE
NEW LEARNING 166 (H. Goldschmid, H. Mann & J. Weston eds. 1974); Gaskins, Dynamic
Limit Pricing: Optimal Pricing Under Threat of Enhy, 3 J. ECON. THEORY 306 (1971); Williamson, supra note 2, at 284-86. See Carstensen, Vertical Restraints and the Schwinn Doctrine:
Rules for the Creation and Dissipation of Economic Power, 26 CASE W. RES. L. REV. 771 (1976).
67 729 F.2d 1050 (6th Cir. 1984), cert. denied, 105 S. Ct. 511 (1985). See text accompanying notes 69-113 infra.
19861
PREDATORY PRICING
v. Agency Rent-A-Car, Inc. ,68 provide vivid examples of the difficulties
that arise for those courts that use an uninformed labeling of
conduct.
III.
Pricing Strategy as Part of a Program of Monopolization:
The Asphalt Paving Case
A.
The Johnson Case
By the late 1960s, the S. E. Johnson Company (Johnson) was
the leading asphalt paving contractor in Northwestern Ohio, but it
was not a monopolist. 69 Johnson confronted a number of active
competitors in bidding for a specialized class of contracts for state
highway and turnpike work. Johnson also had integrated backward,
producing the stone for asphalt which is its bulkiest and most costly
component7" and acquiring paving-related businesses such as a
71
bridge construction company.
In the late 1960s and early 1970s, all paving companies recognized that the amount of paving work from public sources was going to decline substantially. 72 Faced with this shrinking market,
Johnson commenced a program to expand its dominance of the
paving business. It acquired pavers, asphalt producers, and stone
quarries, and also adopted a bidding policy for state and turnpike
projects that kept its bids very low. 73 Although Johnson apparently
never bid below its out-of-pocket costs, its bidding strategy made it
economically unfeasible for other pavers to remain in the business. 74 Many of these firms sold out to, 75 and their owners entered
into covenants not to compete with, 76 Johnson.
Johnson contended that it was more efficient than its competitors and so could charge low but barely profitable prices which its
77
competitors could not meet and remain in business.
Langenderfer, a plaintiff, contended that it was equally efficient but
that Johnson's low prices either were below cost or represented a
price squeeze involving price discrimination against the
unintegrated firms. 7 8
68 735 F.2d 884 (5th Cir. 1984), cert. denied, 105 S. Ct. 910 (1985). See text accompanying notes 114-51 infra.
69 729 F.2d at 1053.
70 Id.
71 Id.
72 Id. at 1052 n.3.
73 Id. at 1054-58.
74 Id. at 1055.
75 Id. at 1053-54.
76 Id. at 1053-54. See also Brief for Appellees at 13, Arthur S. Langenderfer, Inc. v. S. E.
Johnson Co., 729 F.2d 1050 (6th Cir. 1984), cert. denied, 105 S. Ct. 511 (1985).
77 729 F.2d at 1055-56.
78 Brief for Appellees, supra note 76, at 43-44.
NOTRE DAME LAW REVIEW
[Vol. 61:928
Thus, the plaintiffs' experts characterized the Johnson bidding
practices as "predatory" 79 as well as involving a "profit squeeze." 8 0
Johnson, treating the claim as one of "predatory pricing," argued
that its pricing was not wrongful since it was above an accounting
version of total cost.8 ' The plaintiff also stressed thatJohnson's acquisitions, both vertical and horizontal, were key factors in altering
the market. Since the plaintiffs cast this largely as a Clayton Act
claim and did not integrate it with the pricing strategy, Johnson
contended that the acquisitions were intrastate and therefore
82
outside the Clayton Act's jurisdiction.
The jury found that Johnson had violated the Sherman and
Clayton Acts and assessed damages of almost $1 million (before
trebling).8 3 In addition, the trial judge awarded injunctive relief.
The injunction focused on the conduct of Johnson, but seemed
aimed at eliminating its monopoly power as such and not merely
regulating the abusive conduct of an unchallengable (lawful) mo84
nopoly. The judge refused any structural relief.
Both sides took appeals. Johnson conceded, on appeal, its monopoly position but claimed that because its prices were above "total cost," they were lawful. It also argued that the Clayton Act did
not apply to its mergers because they were intrastate.
Langenderfer's argument emphasized the strong evidence ofJohnson's intent to monopolize the market and the conclusions of its
experts that Johnson's methods were anticompetitive. It also asked
reversal of the refusal of structural relief so that a competitive structure could be established in the market.
The circuit court majority held that sinceJohnson's prices were
above "total cost," they were per se lawful. It also held that a private plaintiff had no standing to seek divestiture under the Clayton
Act's antimerger provisions, but it held thatJohnson had unlawfully
monopolized the market and remanded for a new trial to determine
whether any "unlawful methods" had caused the plaintiffs
damages.
This decision reflects a number of problems with present judi79 Id. at 18-21, 26-28, 40-50.
80 Id. at 24-26, 37-39. Johnson was one of only two stone suppliers in the market.
Those two firms followed consciously parallel and noncompetitive prices. Id. at 18, 25-26,
38. IfJohnson shaded its intra-enterprise transfer price, essentially an accounting entry, its
books would show it with above-cost prices while its competitors, who had to pay the higher
"posted" price for stone, could not meet its prices. The brief for Langenderfer included
some specific examples to support this claim. See id. at 19.
81 Brief for Appellants at 19-25, Arthur S. Langenderfer, Inc. v. S. E.Johnson Co., 729
F.2d 1050 (6th Cir. 1984), cert. denied, 105 S. Ct. 511 (1985).
82 729 F.2d at 1052.
83 Id. The judge declined to give the jury any instruction defining predatory pricing.
Id. at 1055. His reasons for this are not clear.
84
Id- at 1059.
PREDATORY PRICING
1986]
cial use of economic analysis, the definition of the basic elements,
and the scope of a private action under section 2 of the Sherman
Act. In order to explicate these problems, we need to start with an
understanding of the alternative analyses ofJohnson's conduct. It
will then be possible to critique the Sixth Circuit's approach to the
case and, finally, to discuss the implications of the decision.
B.
Alternative Economic Analyses ofJohnson's Conduct
Two possible explanations exist for the overall pattern ofJohnson's conduct. The first is that Johnson, being uniquely efficient,
was able to lower both its costs and prices to gain fuller advantage
of its efficiency. Its acquisitions would have no particular bearing
on its resulting market position. Such a distinctly more efficient
firm in a declining market context might well expect to have monopoly "thrust" upon it as it competes by holding its price down.
The alternative explanation is that Johnson employed a classic
dominant-firm strategy of price cutting and acquisition to eliminate
competition.8 5 In this explanation, low prices so inform both existing competitiors and potential entrants that they cannot expect
to make profits in this business. Existing firms will then consider
exiting, especially if their owners have other, more profitable businesses to which they can devote attention and any remaining assets
of the old businesses. The dominant firm's acquisition program
eliminates the remaining assets of such competitors, foreclosing access to the market.
This strategy assumes that entry by construction of new facilities is unattractive. In declining markets, investment in new facilities is indeed less likely than that existing facilities would continue
to be used. If, in addition, the dominant firm enjoys a differential
degree of vertical integration to a level at which oligopolistic pricing prevails, overall enterprise profitability need not be greatly at
risk. It can squeeze prices of competitors at the level it wishes to
dominate, forcing them to exit, buying their assets, and binding
their principals to contracts not to reenter the market, without even
a loss of overall profitability.
To test these explanations, one needs more than claims; one
needs facts. For example, Johnson claimed it was more efficient but
never explained how it achieved that status.8 6 The plaintiffs offered
85 See, e.g., United States v. American Tobacco Co., 211 U.S. 106 (1911).
86 Brief for Appellants, supra note 81, at 21-27. While it is true that the majority seems
to have accepted this claim, see 729 F.2d at 1056, it did so assuming that Johnson's prices
were at or above average total cost and yet below the prices needed by its competitors to
cover their costs. See id. It appears possible that the court committed economic error and,
consequently, its conclusion has no rational basis of support. See text accompanying notes
90-91 infra. Certainly, the defendants' brief relies on an economically incorrect definition
NOTRE DAME LAW REVIEW
[Vol. 61:928
opinion testimony to the effect that the plaintiff companies were as
efficient as Johnson, but the basis for these conclusions is not
87
spelled out in the briefs.
Because Johnson operated several quarries and several asphalt
plants, the usual economies-of-scale explanations seem unlikely. It
was also more vertically integrated than its competitors. It is possible thatJohnson's commonly owned corporations could achieve coordination economies not available to independent firms seeking
the same coordination via contract.8 8 The theory is appealing but is
not even suggested in Johnson's brief.
The strongest case for Johnson, and the basis of the Sixth Circuit's characterization of Johnson as more efficient, was Johnson's
claim that its prices were "above cost"; yet its competitors by their
own admission could not meet those prices and survive.8 9 This
would be strong evidence of greater efficiency-but only if an economically correct measure of average total cost is employed.
Johnson reported that its "profit" margins averaged 5.3% of
its paving revenues. 90 We have no data onJohnson's capital investment in paving, and so we cannot tell how such a return on sales
translates into return on invested capital.
Thus, it seems very likely that the Sixth Circuit, misunderstanding the definition of average total cost, mistakenly concluded
that Johnson's accounting data proved it had charged prices above
average total cost. But unless Johnson's annual sales were twice its
capital investment, it would have been earning less than 10% on its
capital. 9 1
Johnson's assumed efficiency, moreover, does not explain its
pricing strategy. The plaintiffs' evidence established that Johnson
intentionally "left money on the table," i.e., that it knew it could
have bid higher and still gotten the same business. 9 2 Even if it were
of average total cost. Brief for Appellants, supra note 81, at 20 (quoting Utah Pie Co. v.
Continental Baking Co., 386 U.S. 685, 698 (1967)).
87 Brief for Appellees, supra note 76, at 43-44.
88
Cf. Paley, Rational Contracting, Transaction Cost Economics, and the Governance of HMO's,
59 TEMP. L.Q. 927 (1986) (intraorganizational, relational contracting viewed as potentially
more efficient than market contracting).
89 See Brief for Appellees, supra note 76, at 26-28, 40-42.
90 Brief for Appellants, supra note 81, at 13.
91 The accounting options of a multiactivity enterprise would exacerbate the ambiguity
of its return. Overhead costs are frequently not clearly part of any particular activity and
can be allocated at the discretion of the business-an option that a single line firm does not
have. As a result, an accounting system for a multiactivity business can minimize overhead
costs assigned to specific activities, thereby reducing costs and increasing the apparent
profits of that activity. Johnson's multiple activities would have allowed such accounting
practices, yet the plaintiffs did not make such a claim. Overall, Johnson earned about
10.5%, but its primary profits came from its gravel business. Brief for Appellees, supra note
76, at 23, 29-30.
92 729 F.2d at 1056-57. See Brief for Appellees, supra note 76, at 43-50.
1986]
PREDATORY PRICING
more efficient, why would it voluntarily forego present profits? This
is not a market in which today's discount creates tomorrow's loyal
customer-highway departments are notoriously fickle. The discounts were, by definition, equally unnecessary to win the project
and foreclose the specific sale. The only apparent economic rationale would be to signal to competitors that Johnson was prepared to
bid below long-run break-even prices. 9 3 But why give that signal?
Obviously, one explanation is to deter competitors from competing
and hasten their exit from the market. In fact, no other rational,
self-interested motivation would seem to exist.
In this posture, the evidence overwhelmingly suggests that
Johnson was consciously following an exclusionary strategy-a
strategy which relied on prices below average total cost, as an economist would define that concept, to force acquisitions and exits.
Given its substantially deeper pocket and its very profitable stone
business (whose prices and profits were unaffected by the paving
price competition 94 ), Johnson was uniquely able to squeeze out its
less integrated but equally efficient competitors by utilizing prices
which made long-run participation in the paving business unattractive. Moreover, given an uncertain and declining demand, new entry was unlikely.
For exclusionary conduct to be economically rational, the successful predator must be able to exploit its resulting dominance for
some period of time. Otherwise, the cost of "predation" is unjustifiable. Some barriers to entry must exist or they must be created.
Johnson's course of conduct could create at least two barriers to
future competition. The first would be psychological: New entrants would face an established firm with a known willingness to
cut prices deeply. 9 5 Second, potential competitors most able to
enter the market, those with prior experience in the market, are
precluded from entry due to the noncompetition clauses they
signed.9 6
There is, however, a significant motivational question: Why
would Johnson seek to control the least profitable form of paving,
even if it could subsidize that effort with profits from its stone busi93 Johnson's president implicitly offered such a characterization of its prices. Brief for
Appellees, supra note 76, at 17-18.
94 Johnson's profits in its stone business were said to average 27% of net income and to
have produced 60% to 77% of its total net income. Id. at 23. Johnson did not contest
these figures.
95 See Gerla, The Psychology of PredatoryPricing: Why Predatory PricingPays, 39 Sw. LJ. 755
(1985). This barrier will increase as a new entrant must make an appreciable investment in
capital equipment which cannot be resold except at an appreciable loss. That unrecoverable investment is then fully at risk.
96 See note 76 supra and accompanying text. The appellees offered no significant data
supporting these agreements.
NOTRE DAME LAW REVIEW
[Vol. 61:928
ness? 9 7 Several possibilities, not all based on rational economic
calculus, exist. First, control over this class of paving might yield
advantages when competing for related types of business. Elimination of competition within the paving market might reduce potential competition and its pressure on prices in related paving
markets. Second, if firms with large contracts were better able to
negotiate price discounts for stone, control over that paving market
could reduce price pressure on the stone supply market, the very
market from which Johnson received most of its profits. Finally,
despite its expansion into other activities, Johnson's management
may have conceived of the firm as still primarily a paver and, despite any limited potential for substantial long-run monopoly profits, may have chosen to seek and retain dominance of its traditional
market. 98
C.
The Sixth Circuit's Approach
The Sixth Circuit's majority opinion held that substantial evidence supported the claim of Johnson's monopolistic intent 9 9 and
that a monopoly position had resulted from the expansion ofJohnson through its horizontal acquisitions.10 0 Moreover, because of its
vertical acquisitions, Johnson was held to have made its remaining
paving competitors dependent upon it as their primary stone supplier; the majority recognized stone as one of the primary costs in
the paving business. 01'
The majority next listed twelve purported acts of monopolization which the plaintiffs had sought to prove. At this point, the majority stated, in a footnote, a test for unlawful monopolization
which focuses on the lawfulness of the power itself: Plaintiffs "had
to prove that Johnson unfairly attained or maintained monopoly
power."' 0 2 But in the text, the court asked whether 'Johnson engaged in some type of prohibited anticompetitive conduct."' 0 3 This
later standard is a test for abuse of monopoly position or attempted
monopoly.
Thus, at the outset of its conduct analysis, the majority lumped
together two quite distinct analytic models. In addition, the major97 The parties agreed that state highway and turnpike paving was a unique activity compared to similar work done for local government and private accounts. It also appears that
the other forms of business were more profitable. Brief for Appellees, supra note 76, at 32
(private paving yields a higher profit than public work).
98 There was evidence that Johnson's management also acted out of personal animus
toward some of its competitors. Id. at 17.
99 729 F.2d at 1054.
100 Id.
101 Id. at 1053.
102 Id. at 1055 n.7 (emphasis added).
103 Id. at 1055 (emphasis added).
1986]
PREDATORY PRICING
ity later held that Johnson's acquisitions were unlawful and were a
substantial factor in creating its monopoly position. 0 4 As in such
classic cases as StandardOil 105 and American Tobacco,' 0 6 there was an
unlawful program of merger to monopoly whose economic rationale was anticompetitive in the extreme. 0 7 Thus viewed, Johnson's
pricing strategy, which at least eliminated all profits from its competitors' paving businesses, was an important component of its program of monopolization. Such an analysis ought to lead to the
conclusion that the monopoly, if remediable, is itself unlawful. It
also suggests how the pricing conduct, in the context ofJohnson's
existing market position, was in fact "anticompetitive" regardless of
exactly how low prices were relative to some abstract, theoretical
measure of cost.
Such conclusions should then have led the court to a consideration of remedy and damages. The majority instead treated Johnson's pricing conduct in isolation. This analysis assumes that the
only relevant legal issue is the lawfulness of particular acts by a monopolist. Because Johnson's bids "were above the total average
costs" and "Johnson continually made profits on its ventures,"
Johnson was entitled to a directed verdict on the issue of predatory
pricing. The court characterized the plaintiffs' theory as being that
Johnson had "consistently bid below the cost level of smaller competitors.., forcing [them] ...to choose between foregoing sales or
operating at a loss."108 But sinceJohnson had priced above its own
costs, it was "more cost efficient" and had no duty to protect less
efficient competitors. The court's efficiency conclusion rests on its
probably erroneous application of economic definitions to the cost
data. This problem has already been considered. 0 9 The next
question is the legal implication of the conclusion.
The majority argued that a rule requiring a monopolist to price
above its competitors' costs "would work contrary to [the goals of
antitrust law] ... by forcing a larger, more efficient firm to maintain
artificially high prices to the detriment of the public."" 0 This argument presupposes the continued existence of the monopoly and so
suggests it is a lawful monopoly beyond the reach of the law. It also
suggests that each act must stand in isolation. Implicitly, it asserts
that the lawfulness of the monopoly position is not an issue in private litigation. Such cases can only challenge the abuse of the mo104 Id. at 1059-60.
105 Standard Oil Co. v. United States, 221 U.S. 1 (1911).
106 United States v. American Tobacco Co., 221 U.S. 106 (1911).
107 See also text accompanying notes 6-14 supra.
108 729 F.2d at 1056.
109 See text accompanying notes 90-91 supra. See also note 65 supra.
110 729 F.2d at 1057.
NOTRE DAME LAW REVIEW
[Vol. 61:928
nopoly position. Of course, one may well wonder whether such a
restricted view of private rights does not also "work to... the detriment of the public." But the Sixth Circuit's opinion never addressed that question.
Despite this implicitly circumscribed analysis of the plaintiffs'
rights, the majority also found that the acquisitions by which Johnson acquired its monopoly made the monopoly unlawful. Nevertheless, the opinion treated the plaintiffs' right to relief exclusively
as a Clayton Act issue despite clear case law from 1904 that a program of merger to monopoly is also both a section 1 and a section 2
violation."' Consequently, the majority looked solely at the jurisdictional issue under the Clayton Act-interstate commerce-and
then at a relief issue: Can a private plaintiffs in a section 7 case get
divestiture? It held against the plaintiff on both issues. 1 12 Neither
of these conclusions directly resolved the question of a plaintiff's
right to structural relief against unlawful monopoly power.
Despite its conclusion that Johnson's pricing was lawful and
that most of its mergers were beyond judicial review, the majority
remanded the case for a new damage award. The majority reasoned thatJohnson was an unlawful monopolist, and that the plaintiffs therefore had a right to damages so long as the award was not
based on low pricing. This is a mysterious conclusion. If the monopoly was in fact unlawful, and if that fact justified a damage
award, the court should have developed a comprehensive damage
theory explaining when and why damages were warranted where no
more directly relevant relief was allowable. If the monopoly was
not itself illegal, then it is not evident what unlawful acts had occured or caused harm to a plaintiff.
D.
The Implications of the Johnson Decision
The legal theory of the Johnson decision is illusive. In part, the
majority treats this as a case in which the key issue is the lawfulness
of Johnson's monopoly position. But it is never clear why such a
conclusion is relevant. As the analysis in Part II above suggests, the
logical implication of such an approach is that the law should provide a remedy that will dissipate the unlawful monopoly power.
The only issue that would remain is the method of eliminating the
monopoly power. A court could grant an exclusively conductoriented decree in order to hamstring the monopolist, allowing its
competitors to prosper and eventually regain their market position.
Alternatively, the court could dissolve the unlawful monopoly and
directly structure a more competitive market.
111
112
Northern Sec. Co. v. United States, 193 U.S. 197 (1904).
729 F.2d at 1058-60.
1986]
PREDATORY PRICING
The issue of damages in a case granting structural relief should
be secondary because the plaintiff is already receiving a more significant remedy. The right to damages should be limited to proof
that the monopolist caused losses which would not have occurred
had the market remained competitive and free from monopolizing
conduct. While a less efficient plaintiff would get no damages, it
would still merit the injunctive relief and thereby gain a chance to
"try its luck" in the field. Only a plaintiff which clearly would have
survived in a competitive market could claim damages, and then
only for those losses which were demonstrably the result of a difference between the hypothetical competitive condition and the actual
monopolized one.
An alternative reading of the Johnson decision is that in a private suit the lawfulness of the monopoly is not itself at issue. In this
account, the court was solely concerned with a monopolist's stewardship of its power. Such a claim still demands proof of monopoly, but the question then presented was only whether particular
conduct is wrongful when engaged in by such a firm. The court's
analysis could have properly focused on whether the prices charged
were consistent with those which nonmonopolistic competitors
might have rationally charged in the situation. In a declining market, there is good economic and business reason to predict that
prices will fall below both the economist's and the accountant's definition of average total cost. But should the Johnson court have acquitted the monopolist of unlawful low pricing not because its
prices were justified but because they were irrebuttably lawful since
they were above average total cost? The court's factual conclusion
was highly dubious since the information to justify it was not
present.
As a result, the court misapplied its own purported standard.
Moreover, one might predict that no competitor-in the absence of
a monopolistic expectation-would cut prices unnecessarily (as
Johnson did). It would bid low enough to win, but there would be
no reason to give up more than that. Hence, in this context, particular pricing might be purely monopolistic even though prices were
at levels which could occur for other reasons.
This raises a serious question about the price standard chosen
by theJohnson court. Unless the court wished to encourage monopolization, it ought, perhaps, to have differentiated between cases in
which conduct creates avoidable monopoly and those in which it
merely alters the scope or degree of an unavoidable monopoly.
Only in the latter case is it clear that substantial pricing discretion is
without potential detriment to consumers in the long run.
Additionally, there are significant difficulties with such "finetuned" standards. They may implicitly force monopolistic prices
NOTRE DAME LAW REVIEW
[Vol. 61:928
upward. They also make a dominant firm bear a burden ofjustification for a not entirely irrational price (in competitive market terms).
Hence, a court could still rationally restrict damage liability for
pricing to cases in which the prices were more clearly and unambiguously objectionable.
In the Johnson case, the plaintiffs advanced the theory that
Johnson had unlawfully acquired a monopoly, which meant both
that the monopoly itself was unlawful and that plaintiffs had a broad
right to both damages and injunctive relief. The Johnson majority,
on the other hand, basically asked whether a lawful, "more efficient" monopolist might charge relatively low prices, but contradicted itself by subsequently accepting plaintiffs' position that
Johnson was an unlawful monopolist. The lack of focus on, let
alone agreement about, the basis of the challenge to Johnson creates the fundamental confusion in the case.
Properly understood, the Johnson case primarily raised the
question of whether or not a private party might challenge as unlawful the monopoly position of a competitor. While the case law,
as well as the language of section 2, would generally seem to support such a right, there are policy reasons to restrict or forbid such
claims. Private litigants act out of private interest. Assume for the
moment that Johnson's combination of supply sources and plants
did create a substantially more efficient production system. Should
the fact that this occurred through "unlawful" merger and a calculated price strategy, whether above or below some measure of cost,
allow a private party to have a court order either structural or conduct-oriented remedies? The result might be to impose significant
inefficiency on the market.
There are ways to avoid the greatest risk created by these
problems. First, clarifying legal theory about monopoly might
help. If a plaintiff wishes to challenge the lawfulness of power itself, it should bear the burden of persuading the court that there is
a monopoly, that its origins or maintenance involved anticompetitive conduct, i.e., a showing of conduct which in context lacked legitimate business justification, and that the monopoly itself
similarly lacks justification as a more efficient producer in the market. This last requirement, which can also take the form of proof
that a remedy exists to dissipate the monopoly power without causing significant economic inefficiencies, is a crucial step in terms of
assuring that whatever its source, the monopoly can now be abolished.1 3 Such a case is inherently equitable and need not lead to a
113 In addition, a court tentatively persuaded that structural relief is in order might well
ask either the Antitrust Division or the FTC to participate as an amicus curiae to advise the
court on the merits of the proposed relief.
1986]
PREDATORY PRICING
damage award at all.
It is not clear how far the plaintiffs' proof in Johnson went toward establishing a case of unlawful monopoly power because this
claim was combined with a damage claim asserting abuse of monopoly position. For this abusive monopoly claim, the
remediability of the monopoly would be irrelevant; it would be the
abuse or misuse of the monopoly position that would trigger liability. However, some equitable relief might be in order where recurring abuse was likely. The standards for unlawful abuse could then
be cast in quite strict terms since they would regulate only the conduct of a monopolist whose position is not challenged.
IV.
Strategic Pricing Behavior in Nonmonopolizable Markets:
The Rental Car Case
The Johnson case illustrates present judicial confusion in establishing standards to deal with the conduct of an actual monopolist.
14
Regarding the basic presence of monopoly, the Adjusters case"
stands in marked contrast. It is at least reasonably inferable that no
firm could achieve an economically powerful monopoly within the
replacement car rental market. Moreover, the accused monopolist
was a new entrant whose competitive vigor drove one or two competitors from each of two markets. Yet the Court of Appeals for the
Fifth Circuit evaluated the case as an attempt to monopolize both of
these markets. 1 5 The case thus presented squarely the questions
of whether, when, how, and why courts should, under the antitrust
laws, intervene to review pricing conduct.
Regrettably, but hardly surprisingly, the decision in the Adjusters case ignored these vital questions. Instead, the Fifth Circuit's
opinion addressed the problem of defining "average variable cost"
with a lack of economic sophistication and understanding strikingly
similar to the Sixth Circuit's failures in handling "average total
cost."
A.
The Adjusters Case
Within the broadly defined business of renting cars, there exists a specialized activity of renting cars to automobile insurance
companies as temporary replacement cars for insureds. This business does not involve the high advertising costs and expensive
storefront or airport lobby locations of general car renting. t t 6 It
does require low prices and a specific ability to provide service to
114 Adjusters Replace-A-Car, Inc. v. Agency Rent-A-Car, Inc., 735 F.2d 884 (5th Cir.
1984), cert. denied, 105 S. Ct. 910 (1985).
115 See text accompanying notes 140-46 infra.
116 735 F.2d at 886.
NOTRE DAME LAW REVIEW
[Vol. 61:928
this specialized class of consumers. 117
The Adjusters case revolved around a successful effort by a new
entrant to drive its rivals from the market. The plaintiffs and the
defendant, Agency Rent-A-Car, Incorporated. (Agency), were apparently all relatively new enterprises in this business. The plaintiffs had been the first entrants into several Texas cities. Agency
subsequently entered two of those cities: San Antonio and Austin.
After its entry, Agency made deep price cuts. These cuts conced1 8
edly dropped Agency's prices below its "net operating" costs. 1
Insurance company car rental decisions rest primarily on price,
and the competing renters were unwilling to keep their prices at the
low level set by Agency. Instead, they chose to drop out of this
business." t 9 The price cuts, therefore, established Agency as the
leading insurance replacement car rental firm in both San Antonio
and Austin. Agency's competitors sought revenge in a damage action against Agency, claiming attempted monopolization.
Both sides agreed that there were no technological barriers to
entry in the replacement car rental business. 120 The essential capital ingredients were cars, an office, and a small staff. No heavy promotional or other intangible costs were present. Existing car rental
companies and car dealers, moreover, had the basic knowledge,
equipment, and ability to make entry. Finally, there do not appear
to have been significant economies of scale.' 2' The principal capital investment for such a business is in the cars themselves. Unlike
many capital investments, however, if the cars are no longer useful
in this business, they can, at relatively low costs and with little loss
in value, be reassigned to other uses. This fact means that much of
the capital investment in this specialized business can be recovered
even if the business is not a success. This reduces both the per122
ceived and the actual barriers to entry.
There is no suggestion that the plaintiffs were less efficient
than the defendant. In fact, the pricing data from San Antonio suggest that prior to the price war one of the plaintiffs, Adjusters, was
able to operate successfully at prices lower than those which the
117 Id. at 886, 891-92.
118 Id. at 886-87.
119 Both competitors left the Austin market, but one remained in the San Antonio market. Id. at 887.
120 Id. at 893 & n.10.
121 Nothing suggested that there were rapid declines in average costs as volume rose,
although presumably a few elements in staff size and minimum fleet scale might mandate a
minimum scale. This is a reasonable inference from the cost data which suggests that in
order to cover total cost, regardless of market share, certain rates were necessary. See id. at
891-92.
122 In contrast, an asphalt paving plant has only one economically valuable productive
use and is costly to relocate. Hence, capital committed to the paving business is more at
risk than that employed in auto rentals. Cf Johnson, 729 F.2d at 1054.
1986]
PREDATORY PRICING
defendant charged both upon entry and after it had excluded Adjusters from the market.' 23
Prior to trial, Agency admitted both that its prices were below
cost and that its offices had "net operating" losses. 124 At trial, however, its accountant produced exhibits which allocated its costs on a
daily basis between fixed and variable components. 25 On that basis, only $3.65 to $5.23 of its costs per car varied on a daily basis.' 26
All other costs were "fixed" and did not vary from day to day based
on the number of cars in use. Yet, Agency conceded net operating
losses when its prices were $8.00 a day per car. 127 This means that
less than half and perhaps as little as one-third of its costs were
"variable"; the rest were fixed.' 28 Such ratios imply a large capital
investment relative to operating costs.
The plaintiffs' lawyers objected to this "evidence" as contradicting a prior unambiguous admission.' 29 They did not produce
their own cost allocations or challenge the defendant's methodology but relied on their purely legal objection.' 3 0
As will be discussed later, plaintiffs could have disputed the defendant's labeling process and stressed the tension between an accounting approach to costs and an economic one. They could also
have created ajury issue as to the appropriate measures of variable
CoSt.131
The accountant's price-cost analysis does not explain the rationality of the defendant's conduct. Having shown that the defendant consciously chose to operate at prices below its long-run
costs in a market with low entry barriers, the interesting business
and economic question is, and the appropriate legal issue should
be, why that should have been rational conduct for the defendant.
Only after answering that question does it make sense to decide on
legal standards or evaluate the cost-price calculations.
123 735 F.2d at 886.
124 Id. at 891.
125 Id.
126 Id.
127 Id. The plaintiffs contended that Agency had net operating losses even at prices of
up to $9.50 a day. Id. at 886.
128 The range depends on what costs are taken to represent total as well as variable
costs. Using the lowest variable and highest total costs, the ratio is one-third. The smallest
possible ratio is about two-thirds.
129 735 F.2d at 891-92.
130 Id. at 892-93.
131 All commentators recognize that there are serious definitional problems in particular
cases. At least in some cases, the courts have held such disputed issues present jury questions. See, e.g., William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d
1014, 1036-38 (9th Cir. 1981), cert. denied, 459 U.S. 825 (1982).
NOTRE DAME LAW REVIEW
B.
[Vol. 61:928
Price Cutting as Business Strategyfor a New Entrant
In order to understand business behavior it must be put in context. The traditional microeconomic analysis of price assumes a situation of equilibrium in which supply and demand are in harmony.
New entry into a market will, by definition, disrupt such an equilibrium and cause a dynamic readjustment of supply and, potentially,
demand.
To achieve successful entry, the new firm may need, for a variety of reasons, to offer its goods below any measure of cost. Such
pricing is not necessarily invidious. It is part of the cost of entry. In
fact, the firm should capitalize the losses thus incurred as part of its
total cost to be amortized over time. That is, the firm should be
predicting that in the future its price-to-cost ratio will be sufficiently
favorable to compensate for the earlier expenses plus interest on
that investment.
Such an analysis does not imply that an entrant is expecting a
"monopoly" profit. The reasons for low prices relative to costs on
entry include (individually or in combination) (1) compensating
buyers for taking the risk of buying a new product; (2) expanding
demand to a level which will allow the entrant to achieve scale economies; and (3) keeping prices at competitive levels, expecting costs
to decline because of the "learning curve" phenomenon.
Inducing a change in the source of supply can impose risks and
costs on customers. The primary risk is that an unsatisfactory product will bring losses to the buyer. The primary cost is in assessing
the new product to determine its comparability to the old. A new
entrant can, by a deep price cut, offer partial compensation to the
customer for those risks and costs. Thus, short-term price cuts,
even below average variable cost, can be rational devices for firms
which do not expect to foreclose entry or dominate industry prices.
Second, if demand is price elastic, keeping prices low may generate the volume necessary to achieve economies of scale in production, reducing costs so that the prices become profitable. The
low price would be relatively permanent and sales volume must expand to reduce per unit costs over time.
Third even if, a firm expects a highly competitive market, does
not expect any particular scale economies, and expects that its costs
will initially exceed its prices, still it may be economically rational to
enter the business. New entrants can have significant start-up costs.
In addition, workers and managers will at first be slow and relatively inefficient producers, resulting in high per unit costs. As employee skills develop and managers learn how to speed up the
production process, costs per unit will drop. This phenomenon is
called the "learning curve." It reflects the dynamic cost-effects of
19861
PREDATORY PRICING
experience. If such direct costs will drop substantially in relation to
price, it will be entirely rational for a firm to enter the market, despite its knowledge that its initial variable costs will exceed its present and future prices.
There is, of course, an alternative, less wholesome explanation
for such pricing conduct. A deep-pocket entrant, recognizing that
existing competitors have limited staying power and believing that
a reputation for vigorous price cutting will deter future entry, might
elect to enter a market and foreclose present and future competition by its pricing conduct. This would be rational only if the pricecutting entrant expected at a future time to have sufficient power in
the market to raise its prices and recover its initial losses.
Such exclusionary pricing conduct would be irrational if entry
is relatively easy. If the price increase needed to compensate for
the losses due to the price cuts would induce new entry, cost-recovery would be impossible. 32 The need to recover costs, therefore,
defines a limit to such pricing conduct. A rational entrant contemplating such exclusionary pricing should calculate those costs, capitalize them, and identify the size and duration of the price increase
needed to earn back that sum. If the payback period is relatively
short and the needed overcharge relatively small, the benefits can
exceed the costs even with relatively low barriers to future entry.
While such predatory entry is manifestly anticompetitive, it is
not clear that the courts ought to review every instance in which
such motivations might explain low pricing by an entrant. Where
the prospective future monopoly is not powerful, the social loss is
not great. Moreover, as a practical matter, it may be very hard, if
not impossible, to determine the business purposes behind particular price decisions. This would be especially true in cases in which
the argument for low prices is that they are needed to compensate
customers for risks or other costs or where there is a claim that a
learning curve could be stimulated with a consequent reduction in
costs.
Differentiating such excuses for short-run low prices from
purely exclusionary price cuts would be very difficult. These difficulties in turn could provide existing firms with a legal club to attack any new entrant which used vigorous price competition. It is
indeed for these reasons that the common law tort analysis of unfairly low prices has floundered.1 33
The Adjusters case illustrates the ambiguities inherent in review132 See, e.g., Easterbrook, Predatory Strategies and Counterstrategies, 48 U. CH. L. REV. 263
(1981); McGee, Predatory Pricing Revisited, 23J. L. & ECON. 289 (1980).
133 See notes 42-47 supra and accompanying text. See also Katz v. Kapper, 7 Cal. App. 2d
1, 44 P.2d 1060 (1935).
NOTRE DAME LAW REVIEW
[Vol. 61:928
ing such nonmonopolistic new-entry price cutting 34 Some evidence suggests noninvidious reasons for Agency's price cuts. Deep
13 5
price cuts may have been necessary to get customer acceptance.
The alternative, exclusively exclusionary, theory of pricing also has
some support in the evidence.
Using some of the cost and price data in the opinion, one can
construct two cost-benefit analyses. First, accepting the defendant's cost data, which claimed average total cost of $8 a day per car,
the thirteen months of losing operation in San Antonio yielded approximately a $315 per car total loss. 13 6 The subsequent prices
would have yielded around $2.45 a day above total cost. This is
nearly a 25% markup over average total cost and would, on a percar basis, pay back the predatory expense in a little over four
months. Therefore, if the "predator" could get as little as six
months or a year of car rental at such above cost prices, the initial
investment would be well worth it.
A second calculation based on the plaintiffs' estimate of defendant's total cost, $9.50 a day, suggests that the initial losses were
much greater and that the above cost prices were only about 8%
above total cost. The resulting payback period would be nearly
four years.' 3 7 It is less likely that a successful price cutter could
134 Agency offered no explanation for its conduct. It merely contended that its conduct
did not violate a doctrinal guideline: pricing below average variable cost. See 735 F.2d at
891. The plaintiffs similarly focused on this issue, construing the defendant's admissions as
conclusively demonstrating the point. Id. at 891-93.
135 The price data from San Antonio showed that Agency was unable to acquire any
substantial business after its entry when its prices were a dollar above and then fifty cents a
day below Adjusters' prices. Id. at 886. Only when the price was a dollar and a half a day
below its more established competitors did it receive significant business. It then retained
that business as it raised prices to $9.50 a day, despite its competitors continued presence
in the market. It raised its prices further only after those competitors had exited.
The pricing sequence in Austin was different. Agency entered with price of $7 per day
which was substantially below that of its competitors and only after having driven its competition from the market did it raise its price to $10.45. Agency's entry into Austin came a
year after its entry into San Antonio, and one could easily infer that Agency had determined
that only a deep price cut would cause insurance companies to change car rental sources.
This would mildly contradict the assertion that price alone determined choice of rental car.
136 735 F.2d at 886-87. The total cost is calculated by assuming a 30-day month, and
also by assuming that various price changes came at the beginning of the month in question. On that basis, there were eight months in which Agency lost $1 a day (cost = $8,
price = $7) and another five months in which it lost fifty cents a day (cost = $8, price =
$7.50) yielding a total, per-car loss of $315 for the period from March 1975 through March
1976 during which its prices were below $8. The payback was calculated using Agency's
Austin prices of December 1977 of$10.45 a day. The highest price quoted for San Antonio
was $9.50 during the last period of competition. At $9.50, the direct cost-payback period
would be seven months.
137 The plaintiffs claimed that defendant's total costs were $9.50 a day which would
lengthen the period of loss and increase its severity. The loss period in San Antonio grows
to twenty months and the total loss per car becomes $1,060. The payback at $10.45 falls to
less than $1 per car per day and so the period grows to about four years to recover all
losses, before any interest or carrying charges are recovered.
1986]
PREDATORY PRICING
enjoy four years of above cost pricing. But, on the other hand, if
the markup is a modest 8%, that may make new entry far less attractive given the significant short-run costs that any new competition
would have to incur.' 38
Both sets of calculations rest on very precarious assumptions. 13 They are offered only to illustrate that it might have been
rational for a firm in this business to charge low prices solely to
exclude competitors. It is ironic that the defendant's cost calculations provide the stronger case for such conduct. In addition, the
defendant's assertion that a relatively high proportion of all costs
were fixed would justify a conclusion that new entry could be more
easily deterred. Even though the technological barriers were low,
especially to existing car rental firms, the high fixed costs would
make entry more risky so long as the entrant believed that the established firm had the resources and will to fight back. In such a
case, the entrant would lose the earnings on its substantial investment which, ex hypothesis, is the major cost of entry. This risk of loss
exists even if the capital could be redeployed without cost at a later
date. That Agency, after eliminating its competition, could charge
a 7.5% to 20% premium above total cost and not confront new
competition is some confirmation of this entry barrier analysis.
I make no claim that the pricing strategy described in this case
was in fact exclusionary. My analysis, however, does call into substantial question the black and white analysis of price-cost relationships which the courts have invoked. Prices either above or below
variable cost may be rational for either anticompetitive or pro-competitive purposes in the context of new entry. This analysis also
shows that the most relevant cost data at the point of entry is, in any
event, total cost, and not short-run variable cost, since at entry all
costs can vary. Moreover, the relevant time is not some short-run
period of a day, week, or even month, but at least an intermediate,
and more realistically, a long-run period in which the decisionmaker should look for revenue to justify and compensate for
the costs of entry and operation.
C.
The Fifth Circuit's Approach
The Fifth Circuit's unanimous opinion rejected the plaintiffs'
claim of attempted monopolization in the Adjusters case. It did so,
138 In defining markets for merger cases, the Antitrust Division Guidelines have suggested that a less than 5% price differential is so modest that even if a firm has the ability to
change its prices by that amount, such a firm is not in a market distinct from producers who
respond to price changes of 5% or more. See UNITED STATES DEPARTMENT OF JUSTICE,
MERGER GUIDELINES (1984).
139
They assume, inter alia, that demand is very price inelastic and that the same number
of cars were in use before and after the low price period.
NOTRE DAME LAW REVIEW
[Vol. 61:928
first, by converting economic analysis into almost ungrounded legal
doctrine, and then, by making a highly questionable application of
that doctrine.
First and foremost, the court's opinion accepts without question the proposition that a price below average variable cost constitutes an attempt to monopolize.140 There is, to be sure, both
precedent and scholarly assertions to that effect.' 4 ' But why should
a low price, however low, ipso facto, be thought to be an attempt to
monopolize, let alone an unlawful one? If the concern of the attempt to monopolize prohibition is, as the Fifth Circuit has held in
nonpredatory price cases, only with those actors whose existing and
potential market positions threaten real and substantial monopolies,' 42 then the findings of low entry barriers in Adjusters should
have meant there was no case. Indeed, such a low entry barrier
finding suggests that legitimate business reasons, such as those discussed earlier, could well explain Agency's pricing strategy, even if
these were not the only reasons for its use. Such justifications,
moreover, could well explain both below variable cost and below
total cost prices.
The doctrine which the Fifth Circuit invoked arose in an analysis of the rationality of an established monopolist's deep cutting of
its prices when facing new entrants. In such a situation, the
probability that a below cost price has an exclusively anticompetitive explanation is very great. Moreover, the deeper the price cut,
the greater is that probability. The situational and strategic background which is highly relevant to the rational economic and business analysis of such conduct drops away when the conclusionary
definition of what is a predatory price receives a doctrinal acceptance. Thus, we shift focus, as the parties in this case did, from the
analysis and explanation of conduct to an effort to fit specific price
and cost data into a doctrinal category.
It is a nice irony that the issue degenerated even further into
one concerning the validity of an apparent "trap play" by defense
counsel who gave an admission which lulled the plaintiff into a false
sense of security. The clearest implication of this case is that parties should focus on the cost accounting issues when a new entrant
employs price cuts as part of its entry strategy. Neither the impossibility of achieving significant monopoly power nor the existence of
legitimate business reasons for such pricing are apparently
140 Adjusters, 735 F.2d at 889.
141 See, e.g., William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d
1014 (9th Cir. 1981), cert. denied, 458 U.S. 825 (1982). See also Areeda & Turner, supra note
9; Scherer, supra note 2.
142 See, e.g., United States v. American Airlines, Inc., 743 F.2d 1114 (5th Cir. 1984), cert.
dismissed, 106 S. Ct. 420 (1985).
1986]
PREDATORY PRICING
relevant.143
Despite the Fifth Circuit's emphasis on a doctrinal definition of
predatory pricing, the panel failed to apply this economic doctrine
adequately. The court did not inquire into the question of whether
the defendant's cost allocation scheme satisfied the legal definition
of variable cost. Given the court's list of Agency's investments, the
defendant must have labeled as fixed, costs which varied over relatively short periods of time. The evidence on the ease of entry into
the business strongly suggested that truly fixed costs, in an economic sense, were quite small. Cars, for example, were apparently
treated as a fixed cost; but they can be quite variable for short periods of time given the many other uses which exist for them.
Moreover, given the particular context of this case, one can
easily argue that, from an economic perspective, all of Agency's
costs were variable because it was entering the market. At that
point, it had no fixed costs because costs would only arise if entry
occurred. In that context, entry and all of its associated costs would
be rational only if expected total revenue would exceed expected
total cost over time. 144
The key legal, doctrinal question in Adjusters should have been
whether costs which varied from day to day were the appropriate
measure of the legally relevant "average variable cost." The court
made no findings on this question and presented no reasons tojustify its willingness to accept this cost calculation as the appropriate
variable cost to use in applying its doctrinal rule.
There is a legalistic justification (suggested in a footnote)
which acknowledged that cost issues frequently involve factual dispute and analysis. 4-5 The plaintiffs' case for below variable cost
pricing rested exclusively on the admission of the defendant that its
"net operating costs" exceeded its revenues. Given plaintiffs' duty
to prove below variable cost pricing, all the defendant had to do
was to tender some evidence, however questionable, that not all of
its "net operating" costs were variable, and, absent additional evidence, the claim of below variable cost pricing would have failed.
In that event, the economically more correct position for the
court of appeals to take would have been to hold that once a defendant proves that some fixed costs were included in the cost data
given to the plaintiff, the plaintiff has the burden of proving it made
143 This approach would also command a new entrant, having high initial costs but reasonably expecting those costs to fall as it moves along the learning curve, to charge very
high prices at the outset, even if lower prices would yield greater volume, and consequently, increase the rate of cost reduction.
144 Posner argues that long-run marginal cost (which is equivalent to average total cost)
is the proper measure of cost. R. POSNER, supra note 2, at 188-90, 239-40.
145 See 735 F.2d at 891 n.6.
NOTRE DAME LAW REVIEW
[Vol. 61:928
reasonable adjustments to take account of fixed costs. This standard avoids the implicit and explicit problems found in suggesting
that a daily variable cost figure is the most appropriate figure to use
in defining legally relevant variable costs.
This is not to say that the result in the Adjusters case was wrong.
Plaintiffs' lawyers waited until appeal to contest the defendant's
cost analysis. Moreover, once a realistic assessment of the relevant
market and its "monopolizability" is made, it is hard to take very
seriously any major risk of market exploitation.
There remains a troublesome aspect to Adjusters, however.
One of the plaintiffs was, at least in San Antonio, the lower cost operator in 1974. Although the data are very incomplete, the suggestion is that in a stable equilibrium it would have charged roughly a
dollar a day per car less than its successful competitor. In context,
this appears to be an 8% to 10% lower price. If a higher cost firm,
by absorbing short-run losses of some degree, can in fact drive its
more efficient competitor from the market and deter entry, the operation of an open, competitive economy is harmed, even if no significant monopoly results.
First, the firm which has greater productive efficiency is not rewarded with survival. The lesson is that being more efficient may
avail very little indeed. This may not only deter desirable entry but
it also suggests to firms that they find less efficient but less vulnerable ways to compete to retain market position.' 4 6 Second, the price
to consumers from all firms doing business may in some degree
increase. The risk that a firm will be excluded, even if that firm is
efficient, requires added compensation to justify its incurring the
expense of competing. In addition, potential entrepreneurs and
venture capitalists will not enter unless the potential reward is great
enough to outweigh additional risk. Finally, an efficient competitor
which is victimized in this way suffers an economic loss. Those who
invested as well as those who labored in the enterprise suffer at
least the costs of transferring their labor or capital to some other
activity. If that new activity is a less profitable one, they also lose
the better returns that a more optimal use of labor and capital
would have produced.
D.
Two Legal Conceptions of the Fifth Circuit's Predation Rule
Enough has been said to show that below cost pricing is not
necessarily a tool of monopoly or those who would attempt a monopoly. One even suspects that the Fifth Circuit knew this. The
146 Cf. Salop & Scheffman, Rising Rivals' Costs, 73 AM. ECON. REV. 267 (1983); Schmalensee, Entry Deterrence in the Ready-to-Eat Cereal Industry, 9 BELLJ. OF ECON. 305 (1978); Spence,
Investment Strategy and Growth in a New Market, 10 BELLJ. OF ECON. 1 (1979).
1986]
PREDATORY PRICING
Adjusters case and its like are therefore not traditional attempt-tomonopolize cases. The price rules involved may imply an expansive definition of the attempt concept, one aimed at constructing
rules of fair competition. They may even reflect and illustrate a federalization of the common law prohibition against unfairly low
prices. But they do not constitute traditional section 2 type cases.
The first and most likely explanation for the general condemnation of below cost pricing is that the courts, unaware or heedless
of the narrowly defined context of Turner and Areeda's concerns,
have elected to use the criteria of static price theory to measure the
fairness of prices in all contexts. This tort concept of unfair price
competition is then incorporated into the Sherman Act in order to
establish federal jurisdiction. Yet, neither step has been clearly recognized nor justified.
This explanation reveals why courts intervene in price wars as
well as why they only condemn below variable cost prices. Basically, the static model of price declares that a price below variable
cost is irrational in terms of the profit making, competitive firm.
The model can only explain such prices as conduct aimed at a longrun gain. In the model, such gain will occur only if future monopoly profits exist. It is a truism of the common law unfair price competition analysis that low prices can unjustifiably eliminate equally
efficient competitors from the market. The problem for the common law was identifying how low a price was too low. The economic model provides an apparent bright line answer. If price is
below variable cost, it is bad.
The static price model also suggests that the only plausible explanation for such low prices is the expectation of a future monopoly. This justifies fitting these cases into section 2 of the Sherman
Act and explains the policy rhetoric of the Fifth Circuit. 147
This analysis is profoundly wrong headed, as had been suggested, because it ignores the dynamics of the market. Such bright
line tests often produce irrational cut-offs. If the neoclassical assumptions are relaxed, prices emerge as flexible tools of real competition regardless of their short-run association with equally shortrun cost measures. But a court using simple, static economic theory to guide its thinking may not want this kind of realism. Instead,
the loose association with future monopoly can justify incorporating the below variable cost prices into the attempt to monopolize
category without requiring that a monopoly be the likely outcome
in any particular case.
The resulting rule is in reality a rule of "fair competition"
which constrains the pricing freedom of all market participants. As
147
See, e.g., 735 F.2d at 888-90.
NOTRE DAME LAW REVIEW
[Vol. 61:928
such it may not be without value. Investigation of state minimum
markup laws has, for example, suggested that such laws may impair
harmful selective strategic pricing conduct and reinforce a strategy
of generally low-priced competition. 148 The results in both structural and conduct terms seem to be desirable. Since such laws allow vigorous but cost-based pricing, they do not impair the vitality
of overall competition. They do redirect pricing strategy and so
will in some instances deny competitors the best strategy with
which to compete.
In essence, the no-price-below-variable-cost rule of the Fifth
Circuit is a more effective, but also less restrictive, version of the
minimum markup law. It has a policy rationale, but it is at least
questionable how closely that rationale relates to traditional monopoly or attempt to monopolize law. Moreover, unless the basis
of this particular liability standard is distinctly recognized, there is a
risk that in a case involving an actual monopoly or an actual attempt
to monopolize, the courts will apply the same rules to test the legality of pricing conduct.
In the Fifth Circuit, there is an exception to the presumptive
validity of an above variable cost price. Where barriers to entry are
high, established competitors charging less than average total cost
can be held liable. 149 This is a crude test to separate out real monopoly cases. The Johnson decision, however, suggests that this
standard may be too generous toward potential or actual monopolists since in some cases above cost prices can still create or protect
monopoly, and it does not differentiate between challenges to the
lawfulness of specific prices and challenges to the lawfulness of the
monopoly power itself.
Alternatively, one can explain the doctrine of outlawing all below marginal cost prices in terms of an expansive idea of attempted
monopoly. Any increase in market power or position not justified
by greater efficiency is a step toward monopoly with all its attendant
costs. Below marginal cost pricing is a means by which such results
can occur. If the presumption of such monopolistic effect is sufficiently strong, a court could reasonably demand that the user of
any such price have a clear and convincing excuse. Hence, the apparent per se illegality of below cost pricing is in reality a strong presumption against such prices. A firm which offers as an affirmative
148 See Cook, Deiter & Mueller, The Effects of Wisconsin's Minimum Markup Law (Staff Paper
No. 62, Dept. Ag. Econ., Univ. Wisc.-Madison, May 1973); Paterson & Mueller, State SalesBelow-Cost Laws: An EconometricAnalysis of Effectiveness (N.C. Project 117, Working Paper 79,
Univ. Wisc.-Madison, Sept. 1984). See also T. Paterson, Legal-Economic Analyses of Competition in the United States Food System (Ph.D. Dissertation, Univ. Wisc. 1984). But see
Waxman, Wisconsin's Unfair Sales Act-Unfair to Whom?, 66 MARQ. L. REV. 293 (1983).
149 See 735 F.2d at 893-94.
1986]
PREDATORY PRICING
defense a showing that it had a nonmonopolistic business reason
for its pricing strategy would win an acquittal. Such a defense is
clearly consistent with the theories condemning "low prices" as attempts to monopolize.
The unarticulated theory behind this expansive version of attempt to monopolize law starts with a longer-run view of market
structure change and posits that even efficient firms, unless very
large, are vulnerable. Hence, dominant firms, which can survive
more easily, have the opportunity by strategic, below cost pricing to
alter market structure. The long-run preservation of a competitive
market structure demands, under such assumptions, a strong prohibition of conduct which may needlessly concentrate markets. Early
and strong judicial intervention-in the form of treble damages-is
needed to deter such pricing conduct and preserve desirable market structure.
This theory ties into antitrust policy and echoes some of the
analysis of older merger cases.150 It is also predicated on assumptions frequently challenged by the "new" economic thinking,15 1
and it certainly reflects an expansive definition of the "attempt"
concept in monopoly law. One might wonder whether courts
would endorse such a liability standard if they worked through,
overtly, the steps needed to justify such intervention.
In sum, the rule of the car rental case fits only awkwardly
within the general law of monopoly and attempted monopoly. The
Adjusters court focused on applying a rule about illegal prices rather
than inquiring whether any rule about prices made sense in the
context before it. Despite its limited focus, there is a substantial
question as to whether the court actually applied the economic
analysis it said it wanted to use.
V.
Conclusion: The Future of Predatory Price Analysis in
Monopoly Law
This article has identified and highlighted two crucial problem
areas in predatory price litigation. First, a recurring theme of this
discussion is the lack of direct and articulate linkage between the
pricing conduct challenged as "predatory" and the section 2 prohibition on monopoly. Prima facie, the legal relevence of pricing depends on the legal theory of the case being pursued. Logically, if
one wishes a monopoly declared unlawful and removed, the role
and relevance of pricing conduct is very different than if one is
claiming damages that resulted from a nonmonopolistic competi150 See, e.g., Brown Shoe Co. v. United States, 370 U.S. 294 (1962).
151 See Fox, The Modernization of Antitrust: A New Equilibrium, 66 CORNELL L. REy. 1140
(1981).
NOTRE DAME LAW REVIEW
[Vol. 61:928
tor's low prices. Similarly, a claim of unlawful use of monopoly position which is itself either invulnerable to legal challenge or not
challenged, confronts a court with a third type of claim quite distinct from either of the first two.
It is essential to differentiate among the various possible legal
claims and define the components of each. That process of definition will make evident the relevance of a price-cost analysis to each
type of claim. Only then can courts, litigants, and commentators
engage in rational policy debate as to which of the possible definitions of wrongful, "predatory pricing" should apply to each type of
claim.
Such an analysis could eventually lead to adopting a uniform
definition. But such an outcome seems unlikely unless courts were
simultaneously to take a more tolerant view of structural monopoly
itself or a less tolerant view of conduct by firms with some market
power. In any event, a policy debate on the appropriateness of a
single standard should focus on relevant legal policy questions such
as which monopolies should be condemned and their power eliminated, which acts of monopoly should be torts subject to damage
claims and whether that standard should vary based on the lawfulness of the monopoly power itself and/or on the party seeking relief and/or on the nature of the relief sought, and, finally, which
acts of a firm, not yet in possession of a monopoly, should be condemned as wrongful for either injunctive or damage purposes.
These are difficult policy questions to which there are no certain or
easy answers. But these are the issues that ought to be addressed
before courts resolve the question of defining the predatoriness of
a price.
Second, lawyers and judges who propose to employ economic
concepts must do so with greater care. One of the best known facts
of economic analysis is that accounting data bears only an accidental relationship to economic concepts. Yet, in both cases under
analysis, accounting data was uncritically used as evidence of the
economic concepts employed.
The economist includes profit in total cost while the accountant does not. Hence, recovering accounting costs, including overhead, is not the same thing as recovering the average total
economic cost. Similarly, variable costs include all costs which vary
during a reasonable and relevant time period. A day is probably
never such a period. Cost accounting on a daily basis bears no necessary connection to the economic concept of variable costs. In different contexts, longer or shorter periods will be more appropriate
to the task of defining the relevant variable costs. Relevance in turn
relates to the function of variable costs in defining appropriate
1986]
PREDATORY PRICING
prices in a specific context. Thus, in some cases, as we have seen,
only longer-run prices and costs are in fact relevant.
These quibbles are important, to be sure, only if classifying a
price as above or below some abstract measure of cost is important.
But if a court is going to treat such distinctions as vital, then the
economics ought to be done correctly.
The case law to date is not inconsistent with the conclusion
that "predatory pricing" is a red herring. Such a definitional exercise rests on the rather simplistic legal and economic assumption
that there is a generic test for lawful prices independent of a carefully developed legal standard aimed at remedying one or more of
the concerns of monopoly law, and unrelated to a careful review of
the overall business context.
There is no shortcut past the problems of explaining why monopoly is objectionable (either in itself or because of its conduct)
and, then, fitting the facts of the case to the specific objection made.
If courts and litigants take these steps and face these problems,
then, and only then, will the definition of the "predatoriness" of a
price come from both the context and the theory of antitrust violation. Without this course, the label, except as a colorful term for a
conclusion of wrongfulness, will in fact lack any independent legal or
economic significance.